Group appeared ready to come off life support, says Ian Taylor
The last days of September were always going to prove tense for Thomas Cook, its customers, employees and industry partners.
The group had faced one of only two possible outcomes – a deal or collapse – since May when Thomas Cook announced its banks had agreed a new £300-million credit facility to carry it through the coming winter, but only on condition the group sell its airline.
The implication was clear – Thomas Cook would not survive beyond September without the fresh capital.
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The announcement came alongside half-year results which were stunningly bad, owing to a £1.1-billion write-down of historic goodwill on a deal – the takeover of MyTravel – completed 12 years earlier.
Cook hoped to earn £800 million or more from selling its airlines which would be used to pay down the £875 million the group owed its banks.
The debt to the banks is a little more than half the £1.6 billion debt Cook carries, with the remainder due bondholders.
Yet realising anything like that amount amid the current huge overcapacity among Europe’s airlines proved impossible.
When German airline group Lufthansa withdrew its interest in June, Cook appeared in deep trouble.
Then a lifeline appeared in the form of Chinese group Fosun, already Thomas Cook’s biggest shareholder with an 18.6% stake and a joint-venture partner of the group.
In July, Cook announced provisional agreement on a deal that would see Fosun and its banks and bondholders take over the company.
Fosun would put in £450 million, the banks provide the £300 million already agreed and, with the bondholders, swap their debt for equity.
Thomas Cook’s tour operations and airlines would be separated – with Fosun taking control of 75% of the tour operator and 25% of the airline and the banks the reverse.
In August, the banks came back saying Cook needed more financial headroom requiring the provision of an additional £150 million, which the banks and bondholders would provide.
Banks pulled the plug
The deal appeared on course until last week when two issues arose. First, a group of bondholders threatened to resist the deal.
Those balking were US hedge funds which bought into the bonds hoping to make a killing from Cook’s collapse.
They stand to see pay outs on the credit default swaps (CDSs) they created to re-bundle the group’s debt in the event of bankruptcy and feared the way the deal was structured would see them lose out.
It was to address their concerns that Cook postponed a planned meeting with bondholders last week until September 27 and filed for Chapter 15 bankruptcy protection in the US.
This should have been enough to ensure the hedge funds are paid out by what is called the CDS market determination committee – although now Cook has gone under let’s hope they get nothing.
It was the second issue which proved fatal.
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Early last week, Royal Bank of Scotland and Lloyds – two of the group’s 10 banks – told Thomas Cook they wanted an additional £200 million in credit in place as a standby facility for next winter, having received financial advice that the group could run out of cash again by November 2020.
What a bitter irony that UK banks bailed out by the taxpayer in 2008 should, in essence, pull the plug on a company once owned by the state and cause a collapse which will, no doubt, now require taxpayer’s money be used to repatriate customers not covered by the Atol scheme.
Rescue had appeared likely
Travel Weekly has consistently warned that Thomas Cook could fail come October.
In May, we reported: “Thomas Cook’s disastrous half-year results put the group’s continued trading in jeopardy. Cook has until the end of September to get its ducks in a row.”
In July, Travel Weekly warned Thomas Cook is “poised to go out of business in October without . . . agreement on the recapitalisation and injection of new money.”
In August, we warned again: “Cook requires £2.5 billion to survive, and sign off on it before the end of September.”
Travel Weekly also noted in August: “News that Cook requires still more capital does not boost confidence.”
Yet up to a week ago the odds seemed to be on completion of the rescue deal, for two reasons.
First, Cook’s creditor banks and bondholders would not see the return of their £1.6 billion by pushing Cook into administration.
The most the banks are likely to realise of the £875 million they are owed is about £115 million, according to documents filed in court last month.
The deal would have seen the banks put in fresh capital but also take ownership of 75% of Thomas Cook’s airlines and up to 25% of the rest of the group.
They would have expected to sell the airline at some point. The most-conservative estimate by analysts was that, even if broken up, the airlines would fetch more than £600 million and together perhaps £1 billion or more.
The banks might realistically have expected to realise such an amount in two to three years.
The banks and bondholders would also expect to make something from their minority stake in the rest of the group – by Fosun buying them out, bringing in another investor or listing the group partially once more.
Cook’s shares were worthless by last week, but they were trading at £1.20 and above 18 months ago.
Shorn of debt, Cook could have proved attractive to investors, allowing the banks to recoup some more of their money.
The second reason the rescue appeared set to go through was that it looked a very good deal for Fosun.
The Chinese group was poised to pay just £450 million for a Thomas Cook group free of debt. When Fosun first acquired a stake four years ago, it paid 145 pence a share, valuing Cook at about £2.75 billion.
The cost of the deal was relatively minor to Fosun which spent $38 billion on acquisitions in a recent six-year period.
Fosun could expect Thomas Cook to complement the Club Med business it acquired in 2015 and look to use its name around the world, not least in China where it has a huge home market to add to Cook’s 22 million customers in Europe.
And without that £1.6 billion in debt to service – costing the group £150 million a year – Cook’s new owners could expect the company finally to return a profit.
The end of an era
Yet compelling as these reasons appear, they proved insufficient.
Thomas Cook folded because at least two of the banks got cold feet and the government was not prepared to act as guarantor for an additional credit facility.
None of those involved will pay the price. This will be picked up by 21,000 unemployed staff, hundreds of thousands of disappointed and out-of-pocket holidaymakers, hundreds of Thomas Cook’s trade partners and thousands of hotels and their staff.
The industry will pay twice over – first in the losses and costs incurred as a result of the collapse, and second in the additional costs which will inevitably fall on consumer financial protection arrangements.
The UK repatriation and customer refunds will wipe out the Air Travel Trust Fund and require a claim on the insurance which backs this up, leading to a rise in subsequent premiums which are ultimately paid by the sector and by holidaymakers.
There is a serious obituary to be written on Thomas Cook. But for now it is enough to note that the current Cook management inherited the debt that has brought down the group.
Debts of more than £1 billion, built high through a period of profligate mergers and acquisitions and a failure to restructure, almost brought Cook crashing in 2011.
The group was subsequently refinanced under chief executive Peter Fankhauser’s predecessor Harriet Green, but only at the expense of accruing a debt pile of £1.6 billion.
That said, the repeated raising of the amount Thomas Cook needed to continue trading has been staggering.
When Cook first indicated it was in trouble in February with the announcement that its airline was up for sale, Fankhauser insisted: “I want to underline we have a healthy liquidity. This is a strong business.”
Really? The group needed £300 million in May, £750 million in July, £900 million in August and £1.1 billion by this month.
Cook’s death agony has been painful. Its collapse marks the end of an era.