Getting the upgraded Gogo 2Ku inflight connectivity solution installed on hundreds of planes this year is not a cheap proposition. The company is set to raise another $100 million in a private bond offering; the notes carry a 12.5% interest rate and will mature in 2022, concurrent with two prior offerings ($525mm in June 2016 and $65mm in January 2017).
The Issuer intends to use the net proceeds from the sale of the Additional Notes to accelerate the commercial rollout of Gogo’s next-generation global satellite solution, 2Ku, for working capital and other general corporate purposes.
Earlier last month Gogo noted that the “co-investments with our airline partners” for the 2Ku installs were running above previously anticipated spend rates. At the time the company indicated that was a mix of straight hardware cost (generally recouped over time through a revenue-sharing arrangement) and other program costs like OEM line-fit programs with Boeing, Airbus and Bombardier.
While these installs require up-front investment, they will all produce positive returns in the future. – Gogo CEO Michael Small
Gogo also recently announced that it surpassed 300 aircraft with the 2Ku kit installed worldwide; the company still expects to reach between 400-500 by the end of the year. Said Small earlier this month, “We are going to install twice as many 2Ku [aircraft] in the final four months of this year as we did yet.” And the company just launched a global Ku-band satellite service for larger business jets using a tail-mount antenna system. These contribute positively to the bottom line.
The big challenge for the company is not getting the funding but the interest rate it is paying for the money. The 12.5% rate is decidedly not cheap. And today’s move to secure further funding at the same rate pushes off any hopes of a refinancing to a lower rate in the near future. The company debt continues to carry a B- rating from S&P, the same as when the initial 2016 offering was made.
Because the CapEx on antenna installs generally translates directly to increased revenues the company is still optimistic on the numbers overall.