Analysis: Making sense of the Thomas Cook bondholder dispute

As the travel group scrambles to find an extra £200m to please the banks, another obstacle lurks around the corner, says Amie Keeley

If you’ve become increasingly confused by what is going on with some of the latest twists in the rescue of Thomas Cook, you’re not alone.

Thomas Cook is currently scrambling to find an additional £200m of standby funding after its lending banks, led by RBS, demanded it. This is on top of the £900 million already set out in the proposed rescue deal.

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RBS wants the contingency funding to ensure Thomas Cook can get through the quiet winter period.

But another, more complex hurdle is waiting around the corner in the form of Credit Default Swaps (CDS).

So, what is it and how have we got here?

Some of Thomas Cook’s creditors – its bondholders – are threatening to derail the rescue deal unless they can guarantee a return on their investment.

The proposed deal needs support from 75% of debt holders to succeed and it is understood the group of bondholders has control of over 25% so could therefore vote it down.

This extract from an article in the Financial Times explains the technicalities in more detail:

“The hedge funds are not resisting because they think the rescue plan is a bad one. Nor do they think the restructuring is too favourable to shareholders, rather than creditors. It is because they are worried the scheme might not trigger payouts on Credit Default Swaps (CDS). These are derivatives that behave like insurance contracts, protecting holders against the risk that a company does not repay its debts. Yet while a life insurance contract is simple to settle — a person is either alive or dead — the shades of grey in the death of a company make CDS much more unpredictable.”

To try and ensure the bondholders get their payouts, Thomas Cook moved the creditor vote on the restructuring back a week to September 27 and filed for Chapter 15 bankruptcy protection in the US courts. This is a technical filing which seeks US legal recognition of Thomas Cook’s recapitalisation, which is required due the bonds being issued by a UK listed entity but governed by US law.

Importantly, it does not involve a bankruptcy process of any kind in relation to Thomas Cook. It simply, or not so simply, serves to show the company is insolvent and bondholders should therefore receive CDS payouts.

A panel of lawyers from a group of banks which make up the snappily-named Credit Derivatives Determinations Committees (DCs) in the UK will now decide if a bankruptcy credit event occurred. If it decides it has, this could activate the CDS payouts. However, this is by no means guaranteed.

The panel was due to meet on Thursday (September 19) but postponed the meeting until Monday, for reasons we don’t know.

How pivotal the outcome of the hearing is, is up for debate. One industry insider said there were other means by which Thomas Cook can structure a deal to create a “credit event” to please the bondholders if the CDS route doesn’t bring the desired results.

What we can assume is that if the meeting goes ahead on September 27, Thomas Cook must be confident it will get enough votes to get the deal over the line.

And we were told this week by legal advisor to the Association of Atol Companies, Alan Bowen, that the CAA can extend Thomas Cook’s Atol licence, which is due to expire on October 1, by up to 14 days. This may be necessary if the meeting were pushed back again or if Thomas Cook needed more time to tie up loose ends.

So for now, it’s a matter of ‘watch this space’. Everyone in the industry will be praying Cook can find the £200 million and give the bondholders what they want so it can get this deal done next Friday.

If Thomas Cook doesn’t, the “consequences don’t bear thinking about”, as one industry insider put it.

MoreThomas Cook ‘must be rescued’, staff union says

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Thomas Cook: Travel group confirms need for extra £200m

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