By Paula Seligson and Farhin Lilywala
Flying in a private jet has long been a badge of wealth and success, with proponents ranging from Donald Trump to Beyoncé and Jay-Z. But the link between economic prosperity and luxury travel is among the factors that forced a charter plane company to pay more than it expected for debt funding this week.
VistaJet, founded in 2004 by Swiss billionaire Thomas Flohr as a private aircraft subscription service for corporate executives and wealthy individuals, sold $525 million of senior unsecured bonds today to refinance some of its existing debt, after a week-long marketing process.
Holders of the notes will receive interest at a rate of 10.5% per year, but deal arranger Credit Suisse sold the notes at a discount, to yield 11%, sources told Debtwire. That’s more than the roughly 9% pricing the company was initially aiming for, and a significant premium to the 6.8% average for borrowers with similar credit ratings.
It’s also a lot wider than the 7.75% interest rate on Vista’s existing unsecured bonds. But the company didn’t just have to sweeten pricing to get support from bond investors—it also offered a raft of structural concessions, including tighter restrictions on when the company can distribute cash to its owners.
One of the reasons investors pushed for better terms is the recent plunge in stocks. Market volatility often has this effect, but for Vista it was magnified—because the company’s customers are mainly elite businesspeople, its fortunes are seen as intimately tied to economic growth, sources said.
“This company can grow as long as the stock market goes up,” said one credit investor, arguing that Vista’s sales could plummet in a recession. “There are businesses that are counter-cyclical, cyclical, and ultra-cyclical, and this goes into the ultra-cyclical bucket.”
After weeks of calm in markets, fears of a downturn resurfaced last week when trade negotiations between the US and China broke down, leading to a frenzied selloff in equities that continued this week. This sharpened investors’ concerns about how a recession might impact Vista, sources said.
Similar dynamics have hurt Vista in the past. When commodity prices bottomed in 2016, fears that trial clients like Middle Eastern oil investors would cancel their subscriptions were among the factors that tipped the company into financial distress, leading its bonds to trade at just 30 cents on the dollar, as Debtwire reported at the time.
The bonds have since recovered, thanks partly to multiple equity injections from private equity firm Rhone Capital. For its part, Vista—which currently has a debt-to-EBITDA ratio of more than six times—says its revenue remained stable even during the financial crisis, and has grown every year since then.
In recent months, the company has grown and diversified its business through acquisitions, buying on-demand charter flight company XOJET in 2018, as well as online flight booking platform JetSmarter earlier this year.
The XOJET deal in particular is expected to boost earnings—it provided more than a third of Vista’s total revenue last year—although some observers cautioned that on-demand flight sales would be less reliable in a downturn than subscriptions, where members are locked into three-year contracts.
In marketing materials for the new bond deal, Vista projected $353 million of EBITDA in 2019 if earnings continue to grow at their current pace. After capital expenditures and interest costs, that would leave the company with $188 million of free cash flow for the year.
However, Vista then has to fork out $200 million a year to repay debt attached to its fleet of aircraft. That would wipe out free cash flow and lead to a roughly $12 million cash flow deficit this year, making the company more vulnerable to any fall in revenue.
The company’s aircraft-backed debt was another driver of wider pricing on the new bonds, sources said. Because the aircraft debt is senior in the capital structure and would prevent holders of the new bonds from seizing Vista’s assets, ratings agency S&P estimated their potential recovery value in a default at just 5%.