Gogo Inc. 'CCC+' Rating Affirmed; New Debt Rated 'CCC+'; Outlook Negative

  • Gogo Inc.'s proposed refinancing of its capital structure will boost its short-term liquidity by extending the maturity profile of its obligations, but we expect the company to burn cash over the next year.
  • We are affirming our 'CCC+' issuer credit rating because we do not envision a default within the next year.
  • At the same time, we are assigning a 'CCC+' issue-level rating to Gogo's proposed $900 million senior secured notes due in 2024.
  • The negative outlook reflects the possibility for a downgrade over the next 12 months should the cash burn accelerate and we feel the business could default within the next 12 months.
NEW YORK (S&P Global Ratings) April 16, 2019—S&P Global Ratings today took the rating actions listed above. The affirmation reflects that we view the proposed refinancing favorably as it removes $162 million of maturities due in 2020, significantly reducing the likelihood of a default over the next 12 months. Furthermore, the $188 million cash balance as of the first quarter of 2019 was higher than expected, which allows the company more time to execute its growth plan to continue to build scale in the commercial aviation (CA) business. Still, we believe a portion of the improvement was due to temporary working capital swings. We also continue to recognize execution risk associated with cost-cutting initiatives amid a growth phase in which the company competes aggressively to win new business and improve its brand reputation.
The negative outlook reflects execution risk associated with capturing profitable new business in a competitive industry, with little cushion for further operational disruptions. Still, we recognize operating performance showing signs of improvement in recent months.
We could lower the rating if business conditions deteriorate, such that cash burn accelerates and we view a default as likely over the next 12 months. This could be driven by increased pricing competition, cost overruns, loss of key customers, or a macroeconomic slowdown that decreases take rates.
We could revise the outlook to stable if the business produces break-even FOCF on a sustained basis. This would need to be driven by fundamental business performance as opposed to one-time working capital events. We could raise the rating if we believe business prospects are improved, such that FOCF was expected to be positive for a sustained period, enabling a credible deleveraging trajectory. Additionally, we could raise the rating if the company was to receive an equity infusion from a strategic partner or investor and used for debt reduction, such that we viewed the capital structure as sustainable.
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