Description

Global Eagle (ENT) 1^st lien trading in the mid-80s (L + 750) is an attractive risk / reward with limited downside (top-of-structure + significant collateral coverage + any n-term asset sale proceeds for 1L paydown + leverage through 1L tracking <4.5x on 2020E ests) and equity-like upside (>25% 1-yr-to-par, >18% 2-year-to-par and >15% YTM).  ENT equity was previously written up in early 2018 and the note did a nice job of describing the history and aspects of the business. In the past, the market was largely focused on 3 core controversies: 1) difficult operating history integrating multiple acquisitions, 2) concerns around liquidity / runway and 3) “wait and see” approach to sustainable FCF generation. Fast forward to today, increased evidence around each of these controversies has greatly de-risked the 1L investment, providing strong downside support + equity-like returns + multiple n-term catalysts that should bridge a refinancing of the capital structure in 12 - 24 months:

1) Searchlight / junior capital involvement: in early 2018, Searchlight (a reputable PE firm) provided 2L junior capital (currently ~168MM outstanding) at 12% PIK (w/ equity bells and whistles at hefty hurdles) – they are very much involved (2 Board seats), was instrumental in aligning new mgmt, and we believe might be contemplating a larger play on the industry

2) KPIs tracking: Fundamentals of the business have greatly improved as the growth inflection is occurring on aviation connectivity and to lesser importance on the in-flight entertainment portion of the business,

3) Documentation and collateral provide downside support to the 1L: very limited downside especially as the 1L recently clamped down on the documents by providing amortization relief in exchange for Searchlight PIKing for life and gaining foreign collateral - a large win for the 1L that market is ignoring,

4) Liquidity is more-than-adequate: Unlike in the past, 1L lenders provided amort relief + $40MM of new capital helping provide ENT w/ runway to grow into the capital structure. Liquidity is currently >$85MM and ENT will be sustainably FCF positive moving forward

5) Near-term catalysts: Street expectations are very low, we believe run-rate EBITDA will be >$100MM exiting 2019E and get to a figure that is >$125MM exiting 2020E ($8-$10MM from MAX re-ramping, $5 - $10MM cost saves, $5-$10MM from organic growth). Based on 2020E run-rate exit EBITDA of $125MM, net leverage through the 1L will be ~4.6x at face (and ~4.0x at market)  

Additionally, ENT is in the process of selling its non-aviation connectivity segments … while the market is skeptical of any sale (especially given acq indigestion at Speedcast), we believe the AT&T JV is very likely ($100MM of proceeds driving less than $7MM of FCF so accretive multiple and required 1L paydown). Assuming $100MM of proceeds, I peg net leverage at ~4.25x by YE 20E exit-rate EBITDA and ~3.6x at market price

Cap structure: PF cash is $46MM (for the 1L infusion), liquidity is >85MM, total 1L debt is ~620MM and ~475MM net of cash; Net Debt through 2L is ~643MM, and the TEV is ~$785MM inclusive of equity + converts

Divergent views: 1) Searchlight investment in early 2018 w/ Board representation + credible new mgmt team focused on “controllables” greatly de-risks the 1L downside, 2) upside to 1L is “equity-like” (if asset sales are completed helping provide a path to refinancing, >25% 1-yr-to-par returns … and >15% YTM if takes longer), 3) liquidity is more-than-adequate and biz will  provide evidence of sustainable FCF in the next 1-2 quarters, 4) core biz (aviation connectivity) is predictable and has multi-year runway of >5-10% growth (assuming a punitive $ value / aircraft, this segment alone covers the 1L), 5) aviation connectivity is a much better biz now versus the past (rational competition + attractive growth w/ clarity on multiple large RFPs in the very n-term), 6) mgmt focused on “controllables” and there is likely an additional >10 – 20MM cost savings program announced on the Q3 earnings call for 2020E implementation, 7) downside protection on the 1L is attractive (>1.25Bln cost to build all these biz through acquisitions, a very conservative SOTP gets to >825MM of value excluding NOLs (750MM gross) which might offer additional upside

Catalyst

Q3 earnings on Nov 7th

Clarity on strategic alternatives (MEG connectivity segment + AT&T JV)

Evidence of FCF sustainability

MAX re-ramp 

Clarity on additional cost savings programs

Potential refinancing in 12-24 mths