Shares in Thomas Cook Group Ltd. slumped by more than 70 per cent on Tuesday after the struggling tour operator admitted it had been forced to renegotiate the terms of its £1-billion ($1.6-billion) gross debt burden for the second time in a month.
The talks come just a month after Thomas Cook agreed to borrow an extra £100-million from its lenders – a syndicate of 17 banks, including the U.K.'s four large retail sector lenders – a deal it hoped would have ended speculation that it might breach its banking covenants.
But Sam Weihagen, interim chief executive officer, said on Tuesday that revenue since the group's year-end in September had been worse than expected, piling further pressure on Thomas Cook's cash flow during the slow winter booking season. He attributed the group's lack of travel bookings to on the euro zone crisis and a sluggish recovery in tourism to the Middle East and north Africa.
The shares closed down 75 per cent, taking the declines in the past year to 93 per cent and valuing the equity at £122-million.
The latest set of talks with its banks follow a terrible year for the tour operator, which has issued three profit warnings since January and seen the departure of several senior executives, including Manny Fontenla-Novoa, its CEO of 11 years as the group has been buffeted by the euro zone crisis and the growing use of the Internet to book holidays.
Thomas Cook's cash flow is seasonal as fewer holidays are booked and paid for in the winter, prompting speculation that the group could breach its obligations around Christmas time.
However, Paul Hollingworth, finance director, said he was sure of his lenders' backing.
"We are confident that we will get the full support of our lenders. The rational and right thing for them to do is to support Thomas Cook over this period until ... the peak season."
He said the deterioration in sales had only come to light on Monday when the group held a meeting to assess the travel company's numbers.
The lack of clarity prompted Thomas Cook to delay the release of its full-year results, which were originally scheduled for Nov. 24.
In its last month's debt covenant renegotiation, Thomas Cook's lenders agreed that the group's adjusted net debt could now be up to 4.5 times earnings, before interest, tax, depreciation, amortization and restructuring costs at the end of December, and up to 4.25 times after that. This is an increase from 3.75 times EBITDAR that was agreed in May 2010 – before the trading was squeezed by factors including the impact of the Icelandic volcanic ash cloud.
"Thomas Cook needs further assistance from its banks and this is unlikely to come cheaply or without preconditions that could involve equity," said Nick Batram of investment dealer Peel Hunt. "Therefore, the shares are best avoided until the picture clears."
James Cooke at investment dealer Panmure Gordon said: "Coming just one month after concluding previous renegotiations of its banking facilities shows how swift the deterioration must have been. We think the group will need a major cash call from its shareholders and the biggest risk now is customers decide to alter their booking patterns given the inevitable negative publicity around Thomas Cook."