After failed perp, Brazil's Gol prices $200m high-yield deal

Fri Feb 8, 2013 11:42am EST

NEW YORK, Feb 8 (IFR) - Brazilian budget airline Gol proved Thursday it could get a bond deal off the ground in the wake of its failed attempt at a perp last year.

But the US$200 million 10-year non-call five hardly qualifies as a success after leads were forced to downsize, stick with original guidance and watch prices plummet in the secondary market.

Initial price talk of 11% on the B-/B rated deal seemed reasonable enough in the context of where its other bonds were trading, but in the end investors were already reluctant to gain exposure to this particular credit, not to mention the sector itself.

Earlier in the week, a syndicate official had Gol's existing 2020s trading around 97.00 or 9.83% and saw fair value at 10.625% after accounting for the 2.5-year extension. Its perps, meanwhile, were being quoted at around 11.50% Thursday.

"For something like Gol you need a bigger concession and the market is looking for concessions right now," a banker said.

Concerns about negative free cash flow, heavy leverage, as well as high fuel prices left some investors cold on the credit and leads eventually closed the book at a modest US$450m size before pricing at 98.506 with a 10.75% coupon to yield 11%, flat to initial price talk.

Some question why the company would want to raise debt with double-digit yields and wondered why it didn't opt instead for a cheaper securitized deal, much like other airlines do.

However, it is thought that a bond affords greater flexibility in how the company can use proceeds compared to the more confining lease securitizations guaranteed by Ex-Im bank, which Gol also issues.

Yet talk of investors receiving larger than expected allocations only served to apply further downward pressure on the bonds, which according to one trader, fell to 95.00-97.00 on the break, with several others reporting similar price movements.

Unconfirmed reports that the Brazilian government has been pushing to cap certain airfares have sent Gol's stock lower and also added to the uncertainty surrounding the company.

According to Fitch, the company's total adjusted debt is R$9.7bn (US$4.9bn) as of September 30 2012, versus R$1.7bn in cash and marketable securities. Total adjusted net debt to EBITDA was 14.8x during the last 12 months ending September 30 12.

"The company's financial leverage is high for the rating category and is expected to decline during 2013," Fitch said.

Gol has been considering a reduction in its fleet capacity and hopes are that a stronger economy will help the airline. It is also expected to IPO its customer loyalty program, Smiles, with a board approval pending as IFR went to press, a move that should help it reduce leverage.

"Smiles's IPO will bring some cash to the company, but the bottom line is its credit metrics," said one trader.

The issuer is VRG Linhas Areas, while Gol Linhas Aereas Inteligentes is acting as Guarantor on the 144A/RegS issue. Joint bookrunners were Bank of America Merrill Lynch, BB Securities, Bradesco and Citigroup.

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