21st March 2019

(Free Content) HY Trade Idea: TCGLN

IssuerCpnMaturityCCYS&PDeal SizeLatest PxYTWZ-Spread
Thomas Cook Group PLC6.25015/06/2022EURB750,000,000€ 79.00014.5511434
Thomas Cook Finance 23.87515/07/2023EURB400,000,000€ 67.50014.1121382
Thomas Cook 5Y CDS12/20/2023EUR1350

Business Description

Thomas Cook (TCGLN) is a leading UK-based travel operator focusing on the European market, is the second largest tour operator in Europe.  It’s an integrated business, selling charter holiday packages with flights, transfers and hotels bundled together. The business operates approximately 100 aircraft and 3,100 shops.

However, TCGLN faces increased competition from TUI, Jet2Holidays and online as customers buy flights and hotels direct or via price comparison sites. The business is publicly listed on the London Stock Exchange, with Chinese group Fosun holding a 17% stake.

Recent Results (Q1 19)

Revenue increased 1% to £1.7bn, however operating losses increased to £60m (from a £46m loss). Net debt is currently £1.59bn whilst management announced a ‘strategic review’ of the TCGLN’s airline business, aimed at increasing ‘financial flexibility.’

Group liquidity remained within the minimum buffer range of £150-200m with covenant tests met as of 31-Dec-18. FY19 outlook was unchanged with the group focusing on higher-margin destinations, 30% of the summer bookings were already sold (ahead of this time last year).

Trade Idea

A full or partial sale of the airline business with proceeds aimed at reducing gross debt would clearly be supportive for bonds (with Ryanair reportedly interested) but this is still in the early phases and there is no certainty of an agreement. There is no further clarity regarding the type of transaction or amount of cash proceeds that will be received and with the need for TCGLN to maintain/increase liquidity – there is no guarantee that the bonds will be taken out.

Thus, this creates a likely scenario in which the bonds are left outstanding and TCGLN becomes a smaller, less diversified and lower-margin business with increasing sector competition. TCGLN 3.875 23’s are currently trading at 67.5 and have scope to fall further to 45 cash price under these assumptions.

Source: Bloomberg

Ash Nadershahi

Ash completed two internships at Deutsche Bank and Credit Suisse after graduating from the University of Birmingham in 2008. In 2011 he joined BNP Paribas working on the investment grade credit desk before moving to Credit Agricole CIB focusing on European High Yield credit. In 2016 he was responsible for market-making high yield credit at CFE.