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September 23, 2019 − Thomas Cook Group plc ("TCG") announced (i) the collapse of rescue talks with key stakeholder groups, including noteholders and its largest shareholder, Fosun Tourism Group ("Fosun"); (ii) its application in the United Kingdom (subsequently granted) for compulsory liquidation; and (iii) its delisting from the London Stock Exchange with immediate effect.
On September 16, 2019, TCG and two affiliated Debtors (Thomas Cook Group Treasury Limited ("TC Treasury") and Thomas Cook Finance 2 plc ("TCF2"), together with TCG, "Thomas Cook" or the “Debtors”) filed for Chapter 15 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12984. At the time of filing, the Chapter 15 petitions envisioned that they would be tracking and supporting "schemes of arrangement" in the United Kingdom which would give effect to the restructuring deal that has now collapsed. The Debtors have yet to update their Chapter 15 filings to reflect the shift from a restructuring to a liquidation.
The Debtors, an iconic British brand operating primarily within the European leisure travel industry, are represented in the New York proceedings by Adam J. Goldberg of Latham & Watkins.
The immediate attention and press coverage has been on the stranding of 150,000 (mostly) British tourists and what has been billed as Britain's largest peacetime repatriation of citizens. They will get home. Of much greater concern for the British and European airline and tourism sectors than tourists stranded "in the sun" will be the significant risk of these sectors being stranded "by the sun." In carefully chosen words filed by the Debtors with the New York court, the Debtors place the blame for their predicament on a confluence of three, intertwined factors: (i) economic and political uncertainty in Europe, (ii) heightened competition amongst travel and tourism businesses and (iii) heat. Although the (then still hopeful for life) Debtors may have shown an anachronistic British reserve in declining to take a view (or even giving a name to) "the general political uncertainty" (ie Brexit) impacting the spending habits of its customers; they showed no such reticence in respect of the impact of climate change (or more specifically the changing perceptions as to climate change), specifically noting the "no-fly movement" and British holidaymakers contentment to "enjoy record temperatures at home." The truly chilling news for those companies competing with the Debtors (yes, they are likely to have short-term uplifts from the collapse of a major competitor) is that the "heat" problem is not going away. Even if Brexit is solved, even if the likes of ironically named Chinese investor Fosun have their nerves calmed as to global trade tensions; there remains the burning issue of heat (and just how hot it feels for consumers). The no-fly movement is in its infancy and even for those who are not necessarily prone to activism, the very nature of those destinations chosen by holidaymakers are in flux; one destination becoming too hot and another emerging as now hot enough. It is easier for Britons to become activists when they are happier with their own weather and otherwise no longer part of Europe. There is no small irony that, just as the largest peacetime repatriation in British history was underway [who will star in the Dunkirk-esque thriller as the valiant yellow-vested ATOL insurance representative explaining to a still slightly hungover Keiff from Essex that there will not be duty free cigarettes on his emergency flight home?], there was another allusion to wartime mobilization. The latter from ex-Labour leader Ed Miliband who called on the UK to adopt "wartime footing" to combat climate change.
On September 20th (see below), Thomas Cook updated the market on its talks with Fosun and its noteholders, noting that it had requested a further "seasonal standby" facility of £200.0mn from Fosun (on top of the £900.0mn already asked) because it might run into another 2018 heatwave and a decline in the "lates booking period" as Britons stayed at home enjoying record temperatures in the critical August and September months. Did that £200.0mn (and the collapse in "lates" bookings) crash the deal for Fosun (already heavily exposed to the travel and tourism sectors; it owns ClubMed amongst others)? If so, it may be because Thomas Cook flew too close to the sun.
In a press release announcing the collapse of talks aimed at rescuing Thomas Cook and a UK Court filing seeking a compulsory liquidation, the Debtors stated: “Despite considerable efforts, those discussions have not resulted in agreement between the Company’s stakeholders and proposed new money providers. The Company’s board has therefore concluded that it had no choice but to take steps to enter into compulsory liquidation with immediate effect.
An application was made to the High Court for a compulsory liquidation of the Company before opening of business today and an order has been granted to appoint the Official Receiver as the liquidator of the Company. The Company has requested that its ordinary shares be suspended from listing on the premium segment of the Official List of the FCA and from trading on the main market of the London Stock Exchange with immediate effect.
Peter Fankhauser, Thomas Cook’s Chief Executive, added, ““We have worked exhaustively in the past few days to resolve the outstanding issues on an agreement to secure Thomas Cook’s future for its employees, customers and suppliers. Although a deal had been largely agreed, an additional facility requested in the last few days of negotiations presented a challenge that ultimately proved insurmountable. This marks a deeply sad day for the company which pioneered package holidays and made travel possible for millions of people around the world.”
The Collapsed Deal
On August 28, 2019, TCG “was pleased to announce” that TCG, Fosun, the Debtors’ core lending banks and a majority of each of the holders of the Debtors 2022 Notes and 2023 Notes (together, the “Noteholders,” see "Pre-petition Capital Structure" below) had “reached substantial agreement” regarding the key commercial terms for the Proposed Transaction which were as follows:
- substantially deleverage the Group by releasing certain claims of the 2022 Noteholders, the 2023 Noteholders and the Cash RCF Lenders in relation to approximately £1.67bn of currently outstanding RCF and Notes debt in consideration for at least 15% of the equity and at least a £81.0m subordinated PIK note to be issued by the recapitalized group pro rata to Scheme Creditors (ie a Debt-for-Equity Swap);
- provide the recapitalized group with access to new money financing facilities in the amount of £900.0mn; and
- reorganize the structure of the Group, including legal, economic and financial separation of the Group Tour Operator’s business from the Group Airline’s business, and, at Fosun’s option, the transfer of at least 75% of the Group Tour Operator and up to 25% of the Group Airline to Fosun.
On September 20th, Thomas Cook had updated the market on the status of talks as follows: "Discussions to agree final terms on the recapitalisation and reorganisation of the Company are continuing between the Company and a range of stakeholders, including its largest shareholder, Fosun Tourism Group and its affiliates ('Fosun'), the Company’s core lending banks and a majority of the Company’s 2022 and 2023 senior noteholders.
These discussions include a recent request for a seasonal standby facility of £200 million, on top of the previously announced £900 million injection of new capital. The recapitalisation is expected to result in existing shareholders’ interests being significantly diluted, with significant risk of no recovery."
Events Preceding the Commencement of the UK Proceedings
In a declaration in support of the Chapter 15 filings (the "Frankhauser Declaration") [Docket No. 4], Peter Fankhauser, a director and Chief Executive Officer of TCG, offered the following detail as to the circumstances leading to the UK proceedings and the corollary US filings: “The Group and its business have been affected acutely by a number of challenging macroeconomic and operational factors which have led to a tough trading environment across all Group markets. The specific macroeconomic and geopolitical factors that have impacted the Group’s operational and financial performance include: (a) general economic downturn and declining consumer confidence; (b) competition; and (c) the effects of the 2018 heatwave and environmental concerns, in each case as described in more detail below.
- General Economic Downturn and Declining Consumer Confidence. Spending on travel and tourism is discretionary and price-sensitive. The slowing economic growth in the Group’s European markets and general political uncertainty have affected consumer sentiments and led customers to opt for lower-cost products offered by the Group or its competitors.
- Competition. Over recent years, the industry has seen a substantial increase in travel and tourism businesses focused on online distribution with lower cost structures than traditional retail travel businesses such as Thomas Cook. This resulted in increased competition for the Group and, in certain cases, overcapacity, which has driven down selling prices.
- Effects of the 2018 Heatwave and Environmental Concerns. The heatwave that struck many parts of Europe during the spring and summer of 2018 resulted in a sharp reduction of demand for the Group’s products. Customers across the Group’s European markets delayed holiday decisions as they enjoyed record temperatures at home. This delay in bookings restricted the Group’s ability to achieve the planned margins in the 'lates' booking period in August and September. The Group's performance is significantly reliant on this key period. The Group’s Northern Europe business has been adversely affected by the increased prominence of the no-fly movement which aims to increase awareness of the negative environmental impact of air travel."
The impact of these three intertwined factors has created a near perfect storm for the Debtors, who noted the impact on their bottom line as follows: "TCG’s half year results for the six months ended March 31, 2019 as published on May 16, 2019 (the “2019 Half Year Results”) showed that TCG had sustained an underlying first half loss on an earnings before interest and tax basis of £245 million. The 2019 Half Year Results also announced a £1.1 billion impairment of goodwill relating to the 2007 merger with MyTravel Group plc in light of the Group’s weak trading environment, which resulted in a statutory loss for the six-month period of £1.4 billion."
Pre-Petition Capital Structure
- The 2022 Notes. TCG is the issuer of the €750.0mn with 6.25% guaranteed senior unsecured notes due to mature on June 15, 2022 (the “2022 Notes”) Wilmington Trust as trustee.
- The 2023 Notes. Affiliate Debtor TCF2 is the issuer of the €400.0mn 3.875% guaranteed senior unsecured notes due to mature on July 15, 2023 (the “2023 Notes”) with Wilmington Trust as trustee.
- Revolving Credit Facility. On November 21, 2017, affiliate Debtor and other Group companies entered into an English law governed revolving facilities agreement with the Original Lenders (as defined therein) and Lloyds Bank plc as facility agent (the “RCF Agent”) (the “RCF Agreement”), with £650.0mn in revolving commitments (the “RCF”) and ancillary facilities and £200.0mn and €28.0mn in bonding commitments.
About the Debtors
The Group is (was) headquartered in London, United Kingdom, and comprises TCG’s direct and indirect subsidiaries which operate the Thomas Cook business across the world. Thomas Cook is one of the prominent European brands in the leisure travel industry. Its key markets are the UK, Germany and Northern Europe. It has a history dating back to 1841. The Group serves approximately 22 million customers each year. As at December 31, 2018, the Group had 21,263 employees (including approximately 9,000 employees in the UK) operating from 16 countries and operated a combined fleet of over 100 aircraft through five entities holding air operator certificates in the UK, Germany (two entities), Denmark and Spain. The Group also has approximately 2,800 retail outlets owned and franchised (including 555 shops in the UK) and has 199 own-brand hotels across the world.
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