Thomas Cook debt-holders scramble for protection against default

Reuters , Tuesday 4 Dec 2018

Thomas Cook
A Thomas Cook Airbus A330 aircraft prepares to take off from Manchester Airport in Manchester, Britain September 4, 2018 (Photo: Reuters)

The cost of insuring debt issued by Thomas Cook against default hit a record high and its bonds tumbled on Tuesday, as worries about the travel company's borrowings deepened following its second profit warning in as many months last week.

The world's oldest tour operator said last week it was not in breach of its banking agreements, its lenders remained supportive and it had enough breathing space to handle the debt.

The British company, which employs more than 21,000 people, declined to comment on Tuesday.

Last week, Thomas Cook cut its profit guidance and suspended its dividend, blaming a summer heatwave that swept northern Europe for deterring people from going on holiday.

The company's five-year credit default swap, reflecting the cost of protecting against a default on its debt, jumped 73 basis points from Monday's close to 1,071 basis points, IHS Markit data showed.

The price equates to a 60 percent implied probability of default, one trader said.

The price of the company's 2022 euro-denominated bonds tumbled more than 13.5 cents to a record low of 69.51 cents, according to Refinitiv Eikon data.

Its shares, which have plunged more than 60 percent in the past week, were down 14 percent at 1300 GMT, giving the firm an equity market value of about 363 million pounds ($465 million).

That puts it on course to be demoted from Britain's FTSE 250 mid-cap share index, and is below the company's last published net debt figure of 389 million pounds.

S&P cut its outlook on the company's credit rating to "negative" from "stable" on Thursday, saying its leverage - debt-to-core earnings (EBITDA) - was too high at 5.9 times.

Capital increase?

Bernstein analyst Richard Clarke said there was speculation Thomas Cook might need to raise more equity, and that its shares could also be suffering from uncertainty over Britain's departure from the European Union.

"If you think that Brexit gets more dangerous, then you're not going to be wanting to buy into Thomas Cook at this stage because the fear will be that they're going to have to do a capital raise," he said.

On Tuesday, the Telegraph newspaper reported that Chief Executive Peter Fankhauser was in private talks with institutions to calm nerves after the company's shock profit warning and share price plunge.

A Thomas Cook spokesman confirmed the CEO was meeting investors, which he said was normal after results.

Thomas Cook's bigger rival TUI Group has better coped with the summer heatwave, helped by its greater ownership of hotels and a large cruise ship business, which boost margins and mean its profits are less exposed to unpredictable trading.

This is not the first time large debts have combined with tough trading to hurt Thomas Cook. It was last plunged into crisis in 2011, when unrest in key destinations such as Egypt and Tunisia almost brought the company to its knees.

The current share price pressure on Thomas Cook, which also owns an airline business, is being exacerbated by market negativity towards airline stocks. They have been hit this year by oil price rises, and worries over further possible airline collapses after those of Air Berlin and Monarch in 2017.

There was media speculation in July Thomas Cook could sell its airline, but Fankhauser ruled that out at the time.

"If they're pushed into a corner that is one option," said Bernstein's Clarke, who also speculated Thomas Cook could look to sell its operations in one country, such as Germany.

The billionaire co-founder of Chinese conglomerate Fosun, Guo Guangchang, owns a 13 percent stake in Thomas Cook, according to Refinitiv data. Fosun and Thomas Cook operate a joint venture.

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