Sunday, 6 May 2012

Banks and Thomas Cook the winners in refinance deal

Thomas Cook and its customers will breathe a sigh of relief this weekend as the travel giant has secured financial security until May 2015. Its lenders are likely to be drinking champagne as a consequence of the caveats of the deal.

The lenders, including Royal Bank of Scotland and Barclays have created a £1.4bn package in order to allow the business to restructure and recover following a disastrous 2011. From a position of dominance, the consortium of 17 lenders has placed a 1% fee on the debt as part of agreeing to change the terms of its loans. In real money this equates to a £14m bill for Thomas Cook from the banks.

What may prove to be more lucrative for its lenders is the deal which will allow them to buy a 10% stake in Thomas Cook before May 2015 at a bargain basement price of 8p per shared. This price is 13p lower than Friday's closing price of 21p and the price looks set to rise further should proper decisions are made about its future.

The deal will also see its lenders allowed to 'cash sweep' any surplus money above £250m in its accounts in order to pay off debt.  A failure to hand over at least £100m in March 2013 and March 2014 will result in a fine of 2% of the groups remaining debts on 31st May 2015.

Two more years of guaranteed business for Thomas Cook is undoubtedly good news for UK’s industry and the travel trade in particular. The business is at its most important for their 31,000 employees and several million customers yet its tentacles stretch throughout the industry through its trade supply of holidays and hotel rooms sold through Medhotels. The security will also allow ATOL time to monitor the business and to create a plan in the event of continued poor performance over the next two years.

The rubs of the deal are hardly surprising given Thomas Cook’s debts and huge running costs.  From the outside it seems that the most lucrative element of the deal for its lenders could be to buy the shares at a 62% discount from Friday’s price before the news of the refinance deal broke. It will be interesting to see how Thomas Cook proceed from here and how they will keep running costs down, holiday prices competitive and still allow them to repay several hundred million pounds worth of debt accrued under Manny’s reign.

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