Thomas Cook bonds are trading in the low 30s (from being at 102 a year ago), with the equity off 90%. One broadsheet news outlet cited ‘Brexit is to blame’ – it seems like Brexit gets the blame for every woe at present.
Brexit is most certainly not to blame this time around. Operations have undoubtedly been under pressure because of weak GBP, good weather and an increasingly competitive travel market which is pressuring operations. However, the catalyst for this recent price weakness has been the banks pulling their funding (effectively selling their credit lines at a loss), resulting in a potential near-term liquidity crunch.
Due to the way the operating model works, the business has a large working capital outflow in Q1 of each year, something which requires a large revolving credit facility from which to access liquidity. With the news that banks are exiting their lines of credit at a loss, it creates uncertainty as to how they will fund the working capital outflows given ongoing credit weakness.
Thomas Cook is trying to exit its airlines business to pay down debt, with the business continuing to lose money. The outlook is bleak and so it should be. One quick glance at the financials doesn’t make for happy reading – H1 revenues down 6% YoY and EBIT -£245m from -£170m in the previous year. The new footnotes to the accounts says it all:
“The Directors recognise that there is uncertainty surrounding its timing and terms and the associated conditions in the new financing arrangement, which could impact the ability of the Group to access the required liquidity, and they have concluded that this matter represents a material uncertainty. This could cast significant doubt on the ability of the Group to continue as a going concern.”
It is unlikely this business will turn around, and the price of the bonds tell you that. Liquidity concerns aside, Thomas Cook is going to have to slash the price of holidays if they have any hope of clients choosing them as their travel operator – despite management’s best efforts to remind the public their holidays are ATOL protected.
We have a high bar for entrance into our portfolio and when companies don’t make any cash and are no longer in control of their own destiny, we won’t be the ones found lending.
Disclaimer – At the time of writing Kames does not hold bonds from Thomas Cook in its fund range.