Moody's Assigns 'B3' Rating to Gogo (GOGO); Outlook is Stable

Moody's Investors Service assigned a B3 Corporate Family Rating, a B3-PD Probability of Default Rating and a SGL-2 Speculative Grade Liquidity Rating for Gogo Inc. (Nasdaq: GOGO). Moody's also assigned a B2 (LGD3) rating to the company's senior secured note offering, which is expected to raise at least $500 million in proceeds, with the possibility of upsizing to $550 million. The senior secured notes will be issued at its subsidiary, Gogo Intermediate Holdings LLC, and co-issued at a second subsidiary, Gogo Finance Co. Inc. The company plans to use the borrowings to refinance indebtedness outstanding under its amended and restated senior term facility, which Gogo may prepay at par plus 3.0% of the principal amount of the loans prepaid. Gogo intends to use the remaining net proceeds, if any, for working capital and other general corporate purposes, including potential costs associated with the launch and commercial rollout of Gogo's next-generation technology solutions. The outlook is stable.

Moody's has taken the following rating actions:

Issuer: Gogo Inc.

Corporate Family Rating -- Assigned B3

Probability of Default Rating -- Assigned B3-PD

Speculative Grade Liquidity Rating -- Assigned SGL-2

Outlook -- Stable

Issuer: Gogo Intermediate Holdings LLC (co-issued by Gogo Finance Co. Inc.)

Gtd Senior Secured 1st Lien Notes -- Assigned B2 (LGD3)

Outlook -- Stable

RATINGS RATIONALE

Gogo's B3 CFR reflects its small scale, low margins, high leverage and the expectation of negative free cash flow for the next several years as the company heavily invests in connection with the roll-out of the company's technology roadmap and international expansion. Advanced satellite technology, such as 2Ku, and additional air-to-ground technologies will help address current data demands and enable a platform for future growth. The rating is supported by the company's strong market position in broadband aero communications, the industry's high barriers to entry, a robust revenue growth profile, its continuing long-term relationship with American Airlines (one of Gogo's largest customers), relatively large cash balances and a seasoned and proven management team.

On June 3, Gogo announced that it reached an agreement with American Airlines ("AA") to provide service on a meaningful portion of the American fleet currently served by Gogo. As part of the agreement, Gogo will install its 2Ku service on almost 140 aircraft, increasing the company's total 2Ku awarded aircraft to over 1,200 aircraft, demonstrating a strong market adoption of 2Ku technology. The agreement removes some of the uncertainty associated with Gogo's relationship with AA and provides visibility to Gogo's forecast with 2Ku installs projected through 2018 being locked in at this point in time.

Gogo will continue providing ground-based air-to-ground ("ATG") connectivity, but AA has the option to remove service from as many as 550 aircraft. About 150 of these aircraft will be retired, and AA hasn't decided which providers it will use to upgrade its remaining aircraft. Competitors such as ViaSat and Panasonic could potentially win some or all of the remaining aircraft as AA has demonstrated a willingness to have multiple suppliers for broadband on its aircraft. AA also announced on June 3 that it reached an agreement with ViaSat to provide satellite service on its new Boeing 737 MAX fleet of about 100 aircraft.

Gogo's SGL-2 short-term liquidity rating indicates our expectation that the company will sustain good liquidity through the next 12 to 18 months due to its large cash balances. We expect Gogo to remain cash flow negative for FYE2016 and FYE2017 as the company aggressively invests into growing out the business. As of March 31, 2016, Gogo had $313 million in cash and no revolver. The note offering, assuming it results in $500 million of proceeds, is expected to increase cash balances by about $194 million.

The B2 rating of the senior secured first lien notes held at Gogo Intermediate Holdings LLC (also co-issued at Gogo Finance Co. Inc.) reflect a LGD3 loss given default assessment. The rating is notched down from the LGD model output due to our concern about lower than average recovery due to the heightened technology risk associated with the deployment of Gogo's new 2Ku service. The secured notes are guaranteed on a senior secured basis by Gogo Inc. and by each of Gogo Inc.'s existing and future domestic restricted subsidiaries (other than the co-issuers of the notes: Gogo Intermediate Holdings LLC and Gogo Finance Co. Inc.).

The stable outlook reflects our expectation that the company will continue to produce relatively healthy revenue growth while leverage remains high as Gogo heavily invests during its growth phase.

Given the expectation for high leverage and negative free cash flow, an upgrade is unlikely over the next 12 to 18 months. However, upward rating pressure would ensue if Gogo were to sustainably generate free cash flow and financial leverage approached 4x (Moody's adjusted).

Downward rating pressure could develop if liquidity becomes strained, revenue growth stalls, or if the company is unable to improve its free cash flow profile over time. Additionally, debt financed acquisitions/investments which result in a deterioration in cash flow or a material increase in leverage could result in a downgrade.

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