Distressed Digest

August 30th 2020

Currently tracking 225 credits from 130 companies.

If you wish to view the Distressed Watchlist within Google Sheets, please request access to it and I will shortly grant you access to it.

https://docs.google.com/spreadsheets/d/17CE82ulzQX9KuRBMBeWXdyyx6LSjXqdaTepEc27A-8s/edit#gid=1148751060

Leaders for the Week

Laggards for the Week

Highlights

  • AMC Entertainment (AMC 12.00 ’26) second liens continue to grind higher, trading up 4pts to 35.00.
  • Gulfport Energy (GPOR) saw its unsecured notes traded higher by 4pts to 59.00. The notes are now yielding between 19-20% while the stock trades below $1.
  • Revlon Consumer Products (REV 5.75 ’21) traded up 5pts to 27.
  • CBL & Associates (CBL) unsecured notes traded up 4pts to 40 this week. These notes are now up 18pts in the last 3 weeks ago.
  • Transocean (RIG 7.5 ’31) traded lower by 4.5pts to 20.50 as the company continues to try and restructure their debt.
  • Mallinckrodt Intl (MNK 5.75 ’22) traded up 4.5pts to 22.00 as the issue remain very volatile over the last 2 months.

Gogo Capital Structure Takes Off

It was a great week for the whole Gogo capital structure.

GOGO 9.875% secured debt due 2024 traded higher by +8 points to 104.50.

GOGO 6.000% convertible notes due 2022 traded higher by +24 points to 100.50.

GOGO stock ended up 42% for the week, closing at $5.00 with a market capitalization of approximately $425 million.

I have to admit that I have not followed Gogo closely since adding it to the Distressed Watchlist. My only knowledge was they provided wireless communications for the aviation markets. So I thought it would be a great time to review this interesting situation.

Why the rally?

Earlier this month, Gogo announced it was considering a sale of its commercial in-flight internet business.

Only three weeks later, it has been reported the company is close to selling the unit to Intelsat for as high as $500 million.

It has been an impressive journey over the past six months for Gogo’s capital structure.

Senior Secured Notes

The senior secured notes traded well above par ( 107 / 108 ) to start the year.  The disruption to airline travel due Covid-19 sent the secured notes below 80 from March to May. As of Friday, the notes are trading at 104.50 yielding just under 8% to maturity.

Convertible Notes

With the stock reaching all-time lows in May, the convertible notes fell as well to as 30.  Yet, as the stock recovered so has the convertible notes. This past week, the converts traded over 100 as the stock closed at $5, only 20% away from the conversion price.

Equity

The Covid-19 disruption airlines has affected Gogo’s business. This cause the stock to fall 78% to a new all-time of $1.41 on May 5th this year. Since the bottoming there, the stock has rallied 254% to Friday’s closing price of $5.00.

Business summary

Gogo Inc provides inflight broadband connectivity and wireless entertainment services to the aviation industry in the United States and internationally. It operates two main businesses which are Commercial Aviation (CA) and Business Aviation (BA).

Commercial Aviation contains two segments: North America (CA-NA) and Commercial Aviation Rest of World (CA-ROW). The CA-NA segment offers inflight connectivity and wireless digital entertainment solutions to commercial airline passengers flying routes that generally begin and end within North America. The CA-ROW segment provides inflight connectivity and wireless digital entertainment solutions to passengers flying on foreign-based commercial airlines and flights outside of North America for North American based commercial airlines.

The Business Aviation (BA) segment offers equipment for inflight connectivity, including voice and data services to the business aviation market. Its services include Gogo Biz, an inflight broadband service that utilizes air-to-ground (ATG) network and ATG spectrum; Passenger Entertainment, an inflight entertainment service; and satellite-based voice and data services through strategic alliances with satellite companies. This segment serves aircraft manufacturers, owners, and operators, as well as government and military entities.

Financials

Below is a very quick preview of the company’s financials. For a more details, please checkout the company’s financials on Koyfin.

Revenues topped at the end of 2018 just shy of $900 but have slowly decreased each quarter since. Covid-19 attributed to that decline during the last 3-6 months.

Even though revenues decreased in 2019, EBITDA increased from 2018’s $106.7M to $155.5M.

Quick Business Unit Breakdown

In previewing the two units, the Commercial Aviation (CA) unit recorded 63-68% of the total revenues over the past 5 years. Yet, the CA segment has reported negative EBITDA four out of last five years due to “rest of world” (CA-ROW) segment.

The stronger unit of the two is the Business Aviation (BA) unit which has responsible for the majority of the GOGO’s EBITDA. While the BA unit has not grown since 2018, it remains quite stable. Over the past two years, the unit has generated approximately $140M in adjusted EBITDA from $290M of revenues.

Below is a table of revenues and adjusted EBITDA for the previous five years.

Capital Structure

The company has a fairly simple capital structure. The majority of debt is secured with smaller short-term convertible note which is due in 2022. The convertible note is also convertible into GOGO stock at a conversion price of $6.00.

Market Capital vs Enterprise Value

The company enterprise value has been between $1.0 – $1.5 billion over the past 5 years. Market capitalization has decreased during that same time due to increasing debt levels.

Sale of Commercial Aviation = Refinancing of debt

The main catalyst for the recent performance of Gogo has been the prospective sale of its Commercial Aviation unit. If the company were to close on a sale of this unit it would be a huge credit positive. The 9.875% senior secured notes are currently trading at 104.50 yielding 7.96% to maturity (or around 5.0% to an early spring takeout).

I expect the company to refinance and pay down some of its secured debt if successful in selling the CA unit. It is also a very favorable time for the company as GOGO has until May 1, 2021 to redeem the secured notes at 100. After that date, the redemption price of the notes jump higher to 104.9375.

What about GOGO’s stock?

Complications always arise when trying to sell a business unit, especially during times like now. Adding further risk to closing this deal is the potential buyer — Intelsat. Intelsat, a provider of satellite communication services, recently filed bankruptcy earlier this year. Still in the middle of in-court restructuring, Intelsat as the possible suitor brings added complexity to the deal.

Conclusion

Over a six month period, Gogo’s capital structure went from stable to distressed to stable once again. In my previous posts, I have reported on the most troubling companies within my Distressed Watchlist. While it remains very interesting to review and discuss the troubled situations, it is also nice to report the turnarounds.

With the debt now trading well above distressed levels, it is time to remove it from the Distressed Watchlist. Yet, I will make sure to follow the equity as the company embarks of this possible business unit sale.