S&P Assigns 'B-' Rating to Gogo (GOGO); Outlook is Negative

S&P Global Ratings today assigned its 'B-' corporate credit rating to Gogo Inc. (Nasdaq: GOGO) The outlook is negative.

At the same time, we assigned a 'B-' issue-level rating and '3' recovery rating to the company's proposed $500 million senior secured notes. The '3' recovery rating indicates our expectation for meaningful (50%-70%, upper half of the range) recovery in the event of a payment default. We also assigned a 'CCC' issue-level rating and '6' recovery rating to the company's existing $362 million senior unsecured convertible notes due 2020. The '6' recovery rating indicates our expectation for negligible (0%-10%) recovery in the event of a payment default.

The 'B-' rating on Gogo primarily reflects its very high pro forma leverage of about 10x and our expectation of negative free operating cash flow (FOCF) for the next few years as its international CA business reaches scale. These factors are somewhat tempered by the company's adequate liquidity position, which pro forma for the proposed transaction will consist of $506 million in cash balances. We believe liquidity should be sufficient to fund FOCF deficits for the next several years and potentially until the international CA business breaks even, dependent on the stability of its current customer base and continued momentum with international carriers.

"The negative rating outlook reflects risks concerning international growth plans and our expectation that ongoing capital expenditures from expansion activity will diminish the company's current cash balance, possibly resulting in the need for external financing in two to three years," said S&P Global Ratings credit analyst Rose Askinazi.

We could lower the rating if growth does not materialize in the company's global commercial business or if the company's North America CA business underperforms our base case due to increased competition, leading to sustained negative FOCF and EBITDA interest coverage approaching the low-1x area. Under this scenario, we would have less confidence in Gogo's ability to raise additional capital in a timely manner and would consider the capital structure unsustainable. Although less likely over the next year, we could lower the rating if the company's liquidity position becomes constrained.

We could revise the outlook to stable if the company remains on a path to generate positive FOCF and EBITDA interest coverage improves to the high-1x area, while maintaining adequate liquidity.

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