Thomas Cook Schemes

All,

Thomas Cook applied to the Courts on Friday 30th August, with previously unreleased details emerging. Below is further detail. We will send a restructuring model and recovery calculations tomorrow.

Operationally:

Performance has been worse than even our worst case scenario, with EBIT already £200m worse than prior year and Net debt £800m higher than prior year. The Company appear to be in need of the new money by early October already, a time when they should still be flush with cash.

Net Debt, as at July 2019 was £1,430M, £815m worse off than prior year. Results upto July 2019 have revenue down by £183m (Turkey and North Africa up and not surprisingly Spain significantly down). Underlying EBIT was £206m lower than prior year. To put this in context, Underlying EBIT to June 2018 (9months) was negative “only” £155m.

Coupled with the worsening underlying performance, the Company has experienced significant working Capital outflows. To plug the difference in performance with the difference in cash balance, Working Capital appears to be worse to the tune of £600m.

Transaction:

The three interrelated Schemes themselves only propose to amend the creditor voting thresholds and bring them in line with typical scheme levels. All other amendments are merely aimed at facilitating the subsequent execution of the restructuring under the documentation only and without court sanction.

Moreover, all fresh cash is to be provided in loan form. That includes Fonsun’s investment. Fosun will then have an option to transfer 75% of the Operator and 25% of the Airline to itself (i.e. the shares of the subsidiaries underneath TCG.

Given the Scheme will likely take most of September, the company has opted to launch the scheme before it has a final deal. While the scheme is running TCG are still putting the final touches on the deal. It may save itself a couple of weeks that way.

Also, a number of unknowns remain that will likely be crucial in determining any final terms:

- Until creditors have signed up to a lock-up agreement it is difficult to determine the share of non-European future shareholders and therefore the voting rights that will be distributed in a D/E swap.

- With performance as cataclysmic as the numbers published in the scheme docs, creditors may just want to hold back and establish cash levels at the end of September before agreeing to any final terms.

It’s safe to assume that the directors would have preferred to execute the scheme under court supervision, but that is how tight the time frame has become / how little cash TCG has left.

Two of the three schemes are relevant to bondholders and one to the RCF. The bondholder Schemes are looking to:

A) lower voting thresholds to 75% by value. Bonds are voting as one class.

B) amend covenants in relation to event of default (to prevent accidental event of default)

C) Change percentage of note holders required to call event of default (preventing ‘rogue bondholders’ claiming event of default and causing cross defaults\

The Scheme relevant to the RCF is aimed at changing consent and voting thresholds under the RCF (for similar reasons). RCF creditors are voting in two classes: One for the fully drawn RCF and one for the committed bonding lines.

The Schemes also propose to appoint a Common Terms Agent, who would pursue the second part of the restructuring, namely the actual debt for equity swap, on instruction of a 75% “qualified majority”.

The Debt for Equity Swap:

- The RCF and both bonds are all ranking pari passu and the swap will be applied pro rata between them.

- Under the proposal. Debt totalling £1,670 will be equitised for at least 15% of the group equity. Creditors are also receiving a pro rata share in a subordinated PIK note at TCG level of at least £81m.

- New Money would be required totalling £900m. The new money to be provided as follows:

- £450m Loan Facility from Fosun

- £300m in a new additional RCF Facility

- $150m in New Money.

- The New Money Providers are entitled to at least 78% of the equity in the newly capitalised TCG entity, although this should still be subject to a deal with shareholders.

- As expected, the Group’s leasing facilities are not party to the Schemes, nor to the debt for equity swaps.

CDS:

- Technically the scheme does not trigger a default and a voluntary exchange under the (subsequent) bond documentation might by itself also be formally insufficient to trigger CDS. Note however that the exchange will likely be mandatory for all scheme creditors (for lack of time to execute anything else and because the new structure will be within the existing legal entities).

- Thus in substance we are quite confident that the DC will see through the formalities and recognise the substantial restructuring that is unfolding and therefore trigger the CDS.

Tomas is your analyst. Please call with any questions.