How mismanagement and over-expansion built Thomas Cook’s £1.6bn debts

How years of mismanagement and over-expansion at Thomas Cook built up £1.6bn debt that is now threatening company that invented the package holiday

  • Thomas Cook has amassed £1.6bn in debt and faces £200m financial black hole
  • The company thought it had agreed a £900m rescue package last month
  • But now investors want a further £200m security and the firm could go bust
  • It follows years of mismanagement, over-expansion and spiralling debts  

Thomas Cook’s debt mountain has been building for years but a month ago directors thought they had done a deal which would keep the company afloat.

On August 28, the Group released a statement explaining they had £900m of new money coming in – half from a Chinese consortium and half from their British-based banks and lenders.

They had also agreed that banks would convert most of the money the company already owed into equity in a restructured Thomas Cook – which should have given the troubled firm some breathing room.

Subject to final sign-off from all parties concerned, that deal would have come to fruition next month.

But then, the company says, last week one of the lenders, RBS, got cold feet and demanded an additional £200m ‘seasonal stability facility’ to cover the winter lull in business in the tourism industry.


Thomas Cook’s chief executive, Peter Fankhauser, left and its (then-interim, since permanent) chief financial officer, Sten Daugaard, met in December with worried investors

A couple look at holiday offers in the window of a Thomas Cook branch in Redcar. Tens of thousands of customers could be left stranded abroad if the firm goes bust 

Shares in the company dropped by 20 per cent at the start of the day’s trading following news of its possible collapse

And it is that demand for another £200m, on top of the £900m, which has led some to predict financial could come as soon as this weekend. 

Bosses have blamed Brexit uncertainty but the reality is it has become saddled with a £1.6 billion debt mountain after years of mismanagement and over-expansion.

The firm has also invested in routes and destinations which have proved less popular than expected with tourists. 

Thomas Cook’s chief executive, Peter Fankhauser, and its chief financial officer, Sten Daugaard, met in December with investors worried about the firm’s financial strength and strategy.

Investor concerns were exacerbated when the firm gave a vague outlook for 2019 adding to fears over the impact of Brexit or another crisis in an important package holiday destination such as Turkey.

Hundreds of thousands of holidaymakers are facing an anxious wait today as the British travel agent Thomas Cook was on the brink of collapse (stock image) 

A collapse would leave 180,000 customers stranded abroad – and dash the plans of thousands of families who have booked holidays (Thomas Cook desks at Gatwick earlier this month)

The travel company scrapped its dividend last year in an effort to retain cash and blamed a disappointing year on the prolonged summer heatwave across Europe, which meant people delayed their bookings, especially in the UK.

Many travel firms also had to discount their packages heavily in the late booking market.

However, investors also suspect the firm overbooked hotel room capacity, particularly in highly competitive Spanish destinations, forcing it to discount heavily as the market softened.

In late 21018 analysts feared the firm was facing structural challenges – beyond the one-off problems caused by the unusually hot summer – that would require significant changes to operations, including the likelihood of further closures in its large branch network.

During financial year 2017-18 the firm closed 100 stores it said were loss-making. 

It said it has no plans for more closures or job losses, but it intends to add more in-store foreign exchange staff to boost branch profitability.

But then this May shares in Thomas Cook plunged 30 per cent after analysts at a bank said the travel firm’s shares were ‘worthless’.

Thomas Cook’s tour operations and airline were worth £738m at the time but with debt valued the same that ‘implies zero equity value’, Citigroup told the BBC.

Citigroup’s damning conclusion came a day after Thomas Cook issued its third profit warning in less than a year and reported a £1.5bn half-year loss.

Its outlook was ‘significantly weaker than expected,’ Citigroup said.

Dr Peter Fankhauser has been Chief Executive Officer of the Thomas Cook Group since November 2014, a veteran of the company since 2001.

Online the company credits his leadership with ‘turning around the UK business as CEO for UK & Continental Europe’ and he was made Chief Operating Officer in November 2013 before getting the top job the next year.

 Last night, RBS denied that it was responsible for putting pressure on the deal. A spokesman said: ‘We don’t recognise this characterisation of events. 

‘As one of a number of lenders, RBS has provided considerable support to Thomas Cook over many years and continues to work with all parties in order to try and find a resolution to the funding and liquidity shortfall at Thomas Cook.’

How troubled Thomas Cook has come to the brink of bankruptcy

Why is Thomas Cook in such a state?

Bosses have blamed Brexit uncertainty but the reality is it has become saddled with a £1.6 billion debt mountain after years of mismanagement and over-expansion. In July, the firm announced it had struck a rescue deal led by its biggest shareholder, Chinese conglomerate Fosun International, as well as its banks. Together they agreed to stump up £750 million to save it from bankruptcy. This emergency injection was topped up by another £150 million from other key backers including hedge funds, to see it through the winter.

Isn’t that enough to keep it afloat?

Thomas Cook’s lenders, led by Royal Bank of Scotland and Lloyds, are demanding another £200 million or they will pull the plug on the deal. The banks have already handed Thomas Cook a £675 million overdraft and are running out of patience. They fear the firm still does not have enough cash to tide it over during the off-peak season, including to pay suppliers and hoteliers. This has resulted in a stand-off, with Fosun and Thomas Cook’s hedge fund backers refusing to pay up, and the banks unwilling to budge.

Why can’t they just bide their time?

Thomas Cook bosses fear they will have to call in the administrators within days if neither side agrees to stump up the funding. It is a criminal offence to continue trading – and to take holiday bookings – when insolvent. Another reason the crisis is coming to a head is Thomas Cook’s Atol licence is up for renewal on October 1. Every company is required to hold an Air Travel Organiser’s Licence issued by the Civil Aviation Authority. Travel companies also have to put down deposits for hotel bookings for the following summer by October 1 – another reason why Thomas Cook’s position is so precarious. 

 

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