Credit Default Swap Holders add Turbulence to Proposed Thomas Cook Bailout

Updated: Jan 11

The United Kingdom’s 178-year-old tour operator, Thomas Cook Group plc, faces bondholder headwind in executing a recapitalization plan announced last Summer.


A Thomas Cook Airlines A330 Takes off From Birmingham - Photo Courtesy Thomas Cook Group, plc

Background


On August 28th, Thomas Cook detailed the status of an aggressive recapitalization plan that would place the highly leveraged tour operator on solid footing by early October. The highlights of the plan described in the press release included an injection of £900 million in “new money” and the cooperation of the majority of 2022 and 2013 senior noteholders. In the plan, the Chinese conglomerate Fosun (owner of Club Med) would contribute £450 million in exchange for a 75% equity stake in the tour business and 25% of the airline. The other £450 million would be provided by current lenders and noteholders and include a conversion of debt to equity, with the second group acquiring the remaining 25% of the tour business and 75% of the airline. The plan would result in a substantial dilution of equity for current shareholders, which would essentially wipe them out.


Developments


Last Monday, the company filed for Chapter 15 bankruptcy in the U.S., stopping short of declaring the company insolvent. A creditor meeting that had been scheduled for September 18th, has now been pushed to next week. According to uscourts.gov, “The purpose of Chapter 15, and the Model Law on which it is based, is to provide effective mechanisms for dealing with insolvency cases involving debtors, assets, claimants, and other parties of interest involving more than one country.” Basically, a Chapter 15 filing is a technical administrative instrument used by multi-nationals as part of a primary restructuring that takes place under foreign jurisdiction.


Credit Default Swaps/Credit Event


Some hedge funds who own Thomas Cook bonds such as Germany’s Xaia and Mayfair-based Sona Asset Management also have credit default swap (CDS) insurance, which will only payout during a “credit event.” According to Reuters, on September 19th a Credit Derivatives Determinations Committee (DC) will determine whether a “credit event” has occurred with the U.S. bankruptcy filing, in relation to U.K. based Thomas Cook, plc. This determination is critical because creditors are supposed to vote to approve the rescue plan on September 27th, with court approval scheduled for September 30th. Naturally, holders of CDS insurance would like to receive a guaranteed payout, as the restructuring plan will exchange the debt for equity in the restructured firm, eliminating the bonds and thereby rendering the CDS insurance worthless. Without approval of the recapitalization plan by the end of September, a way forward for the Thomas Cook Group, plc and it’s 22,000 employees is unclear, especially now that the busy Summer holiday season is ending.



Source(s): Thomas Cook Plc, Reuters






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