Thomas Cook bonds fall to lows amid debt fears

Thomas Cook’s bonds tumbled to record lows after reports that questioned the company’s ability to return to profit and avoid being crushed under a pile of debt.

The bonds hit a record low, and the shares have fallen as much as 60% in three trading days, as Sky News reported that a payment intermediary would be withholding money from Thomas Cook.

Analysts have suggested that a debt-to-equity swap would be a potential solution for the world’s second-biggest holiday company. Its 2022 bonds have lost more than 50% of their value this year, as the junk-rated company faces mounting losses and an increasing debt pile.

A payment company working with Thomas Cook in the Nordic region is in talks to extend to several weeks, instead of two days, the period for which it retains payments for trips, Sky News reported. A Thomas Cook spokeswoman later confirmed the company is in discussions with the Nordic card supplier and that they expect an “acceptable solution in the coming days”.

“There’s definitely a prevalence of fear in the market. The Sky News story shouldn’t really be a huge surprise...similar to retailers like Debenhams, when suppliers were refused credit insurance. It’s a natural reaction,” said Neill Keaney, an analyst at CreditSights.

“However, the headlines are undoubtedly going to stress bookings,” he said.

Thomas Cook is the most dramatic outcome so far of a tough business environment for European travel and airline companies. Lufthansa has frozen expansion at its discount arm, while Ryanair warned its profit may fall further this year. It posted a £1.1bn (€1.25bn) writedown at a UK arm last week and it warned of another tough summer ahead.

Thomas Cook should undertake a “substantial debt for equity swap” to improve its balance sheet, said Citigroup analyst James Ainley. Converting £1bn in outstanding bonds would allow the company save interest payments and remain in business in the long run, while it also likely would mean there would be “little or no value for the existing equity holders”, he said.

Thomas Cook shares fell as much as 17% yesterday, following a 40% drop on Friday, leaving its market value now about £150m.

Bloomberg

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