A seemingly dire deterioration in trading has forced Thomas Cook to go back to its banks to ask for more lenient borrowing conditions only a month after it concluded its last financing discussions. The shares shed more than 70 per cent of their value on the news as the market lost faith.
The tour operator's shareholders should have felt entitled to a deep sigh of relief when Cook's debt deal was announced on 21 October. In exchange for a 50 basis point increase in its interest charge and restrictions on its ability to pay dividends and buy back shares, lenders had relaxed loan covenants and agreed to provide £100m more credit ahead of the summer-holiday booking season. But the buffer lasted barely a month and the terms of any fresh deal with Cook's 17 banks are likely to be much more stringent and could threaten significant dilution for existing shareholders.
Banks have every reason to demand major assurances from Cook, be it equity for themselves or a fundraising from existing shareholders, as such a rapid deterioration in trading is alarming for a company with little sales visibility and only a caretaker chief executive. As well as wanting to adjust financial covenants, which Cook may breach if recent torrid trading continues, the company wants a larger short-term loan to tide it over the leanest part of the year for cash generation.
The real fear for the business is that it will not only be bankers and investors that are watching aghast. If holidaymakers start to shun the group due to fears about its financial stability and suppliers demand improved settlement terms, Cook could find itself in a downward spiral and rivals will doubtless try to pinch its customers. But while there could be an upside for rival travel groups from Cook's malaise, the rapid deterioration in the market should be viewed as very worrying for all players.
