Crumbling profit expectations and net debt of �865m had left the group struggling to meet bank covenants on its borrowings
Lenders to Thomas Cook have temporarily relaxed borrowing terms for the debt-laden tour operator to ensure the group stays within its bank covenants over the slower winter holiday season.
The reprieve came as Thomas Cook's new chairman designate Frank Meysman, who joined the board this month, continues the urgent search for a chief executive to replace Manny Fontenla-Novoa, who departed abruptly two months ago.
Fontenla-Novoa left following a string of profit warnings. Crumbling profit expectations and net debt of �865m had left the group struggling to meet bank covenants on borrowings.
Like all tour operators, the bulk of Thomas Cook's revenues are related to the busy summer months while outgoings such as hotel bookings fall due in the winter, though it runs tours to Christmas markets across Europe. This left investors and analyst fearful that the group would struggle to meet a quarterly covenant test in December.
Under the deal banks agreed to relax the covenant thresholds and also extended an additional �100m facility for December and January. In exchange, if Thomas Cook needs to rely on the new loan terms, its cost of borrowing will rise.
Douglas McNeill, an analyst at Charles Stanley, said the deal with the banks was a "positive development" but is likely to be only the first of a series of measures the company will need to deploy in the coming months. Also among the group's priorities, he suggests, should be "an exit from India, a new chief executive, and a rights issue".
Asked if the latest deal with the banks averted the need for a rights issue, a spokeswoman for Thomas Cook said: "As Thomas Cook has said before, it would be wrong to rule out any potential course of action that can accelerate deleveraging. Thomas Cook recognises the need to get debt down and is taking a number of actions to achieve this including disposals, a temporary suspension of dividends and a hold on acquisitions."
The tour operator has pledged to generate �200m from disposals, but has yet to flesh out the details.
Investors are expecting interim chief executive Sam Weihagen to announce a strategic review of the tour operator's troublesome UK division alongside the group's full-year results next month. A new management team has been installed in Britain.
Some elements of reforming and scaling back the UK business are already in progress. Six aircraft are to be cut from the 41-strong Thomas Cook's UK fleet to match shrinking demand. Similarly, some 500 hotels in traditional "mainstream" summer package holiday destinations, such as the Spanish Costas, which had previously been available to UK holiday-makers have been delisted in line with the subdued market.
Some 24 high street travel agent outlets have also been earmarked for closure and there are plans afoot to cut jobs by merging the head offices of the Co-op's travel business and the Peterborough headquarters of Thomas Cook UK, following the recent merger.
Deeper cuts into the UK business are thought likely next month, though it is unclear whether the group will have a chief executive in place by then.
During the summer persistent concerns over Thomas Cook's British business culminated in the resignation of UK boss Ian Derbyshire, who left to join a business run by his family. Other directors to depart from the UK division include the finance director and two divisional heads.
Adding to concerns over how the UK business has been run was the discovery by divisional finance director Michelle MacMahon in August that �21m of receivables in the accounts should be written off as the amounts were unlikely to be recovered.
Source: http://www.guardian.co.uk/business/2011/oct/21/thomas-cook-bank-covenants
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