Tired of spotty in-flight Wi-Fi service? The junk bond market may be able to help.
Gogo Inc., the provider of often-griped-about Internet service on airplanes, said it’s planning to raise $500 million in a bond offering that has been rated six-levels below investment-grade by S&P Global Ratings. Proceeds will be used to refinance debt and for general corporate purposes, including funding costs related to “the launch and commercial rollout of Gogo’s next-generation technology.”
The company is tapping the junk market for its first-ever bond offering amid a high-yield rally that began with the bottoming of oil prices in February. The extra yield investors demand to hold the notes over Treasuries remained near year-to-date lows of 6.24 percentage points on Friday. Companies sold $6.65 billion of below investment-grade debt this week.
The high-yield market seems open to first-time issuers of higher quality, Tom Price, a money manager at Wells Fargo Asset Management, said. Investors pumped $1.13 billion into funds that buy high-yield debt in the week ending May 18, the first inflow in three weeks, according to Lipper U.S. Fund Flows data.
“Single-B and BB credits still, I think, can access the market reasonably,” Price said. “When you start getting to CCCs, that becomes a little bit of a different story.”
Moody’s Investors Service graded Gogo’s bonds B2, five levels below investment-grade. S&P rated the notes B-, one step lower.
The company plans to use proceeds from the offering to refinance debt and for general corporate purposes, including funding costs related to the launch and rollout of its “next-generation technology.” The sale may price next week.
Gogo needs $100 million to $200 million to install its new 2Ku satellite system through the end of 2018, according to Andrew DeGasperi, an analyst at Macquarie Group Ltd. The company is installing the technology on about 600 Delta Air Lines Inc. aircraft and may have to spend as much as $1 million per plane to replace antennas on satellite-equipped airplanes, he said.
“Capital expenditures needs are going to be significant,” DeGasperi said. “The competitive environment in this industry is pretty intense right now, even in North America which everyone felt was sort of locked up by Gogo.”
Gogo spokesman Steve Nolan said the company has a total backlog of more than 1,100 2Ku installations and can put in the technology for less than $500,000 per aircraft in what is typically a shared cost between the airline and Gogo.
Gogo has been embroiled in a public spat with American Airlines Group Inc., which wanted to exit its contract with the in-flight Internet company in favor of a rival that offered faster service. Gogo has touted 2Ku, which uses satellite technology instead of relying on cellular towers, as the next-generation platform that can compete against offerings from ViaSat Inc., Panasonic Corp. and Global Eagle Entertainment Inc.
Gogo sold $362 million of five-year convertible notes last year, according to data compiled by Bloomberg.