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Gol’s Plan to Raise Cash with Delta’s Support Is Credit Positive for Gol
On Tuesday, Gol Linhas Aereas Inteligentes S.A.’s (B3 positive) board of directors said that it had approved an
agreement between its controlling shareholder, FIP Volluto, and Delta Air Lines Inc. (Ba2 positive) to strengthen
Gol’s capital base and liquidity via a joint equity investment and debt issuance effort. These transactions are
credit positive for Gol because they will potentially bring up to $446 million in cash into the company, which
will increase liquidity as it contends with operating cost pressures and slowing demand growth in its home
market of Brazil.
Delta’s increased investment in Gol also demonstrates its commitment to the companies’ partnership, which
will provide further benefits to Gol, including increased cooperation on aircraft and engine maintenance as well
as additional code-sharing and increased market penetration.
Under the proposed agreement, Gol will issue $146 million of new preferred non-voting shares. FIP Volluto will
invest up to $90 million in the newly issued shares, reflecting its 61% preemptive rights in the offer, while Delta
has agreed to invest up to $56 million, reflecting its 2.9% preemptive rights to the capital increase, plus any
remaining shares not acquired by other minority shareholders. The capital increase approved by the board of
directors sets an issuance price of BRL7.2 per share, slightly higher than closing price of BRL6.94 per share on
Tuesday. If the minority shareholders do not follow the capital subscription, we estimate that Delta’s
participation in Gol’s economic capital would reach about 9.5%. Gol expects the subscription period to last
until mid-August and expects to complete the equity offering by early September.
Additionally, Gol’s board has approved the issuance of a new term loan totaling $300 million, which will benefit
from a backstop guarantee from Delta. In turn, Gol has agreed to provide Delta a security interest made of
common shares of Smiles S.A. (unrated), its coalition loyalty program company, as collateral to recoup any
payments that Delta might make under the backstop guarantee it will provide on the new notes. Gol currently
has a 54.3% stake in Smiles’ capital, which is worth about $1.2 billion. By lending its balance sheet strength to
Gol, Delta enables the Brazilian carrier to secure a lower interest rate on the notes than it would otherwise
obtain on its own.
The business environment for the Brazilian aviation industry has been challenged by deteriorating demand from
corporate passengers because of the country’s slowing economy and weakening consumer confidence.
Additionally, the continued devaluation of local currency, which has lost 14% of its value since year-end 2014,
is pressuring Gol’s profitability and reducing most of the benefits that we expected from lower fuel prices in
2015. After what we expect will have been a beyond-seasonally weak second quarter, the capitalization efforts
during the third quarter will potentially restore Gol’s cash available to meet its debt maturities over the next
12-18 months, improving its liquidity and increasing its ability to deal with challenges such as lower yields and
high cost pressures. Nevertheless, Gol’s leverage metrics will remain under pressure, with adjusted debt/EBITDA
rising up to 8.0x by the end of 2015 from 5.3x in 2014.
