Moody's downgrade TCG
All, below is a note from Tomas on the TCG downgrade today:
Wolfgang
Nothing surprising in this except the delay - talk about liquidity and particularly the CP market.
London, 26 April 2019 -- Moody's Investors Service ("Moody's") has today downgraded the corporate family rating (CFR) of the British
tourism group Thomas Cook Group plc (Thomas Cook) to B3 from B2 and its probability of default rating (PDR) to B3-PD from B2-PD.
Moody's has also downgraded to B3 from B2 the rating on Thomas Cook's EUR 750 million senior unsecured notes due 2022 and
downgraded to B3 from B2 its EUR 400 million senior unsecured notes due 2023 issued under Thomas Cook Finance 2 plc. The ratings are
placed under review for further downgrade. The outlook on both entities has changed to rating under review from negative.
"Today's rating action reflects our concerns over the company's ability to recover its credit metrics after the sharp deterioration in fiscal year
2018 due to the ongoing challenging market environment. We expect further negative free cash flow generation this year to pressure already
weakened liquidity. A sale of the Airline business has the potential to improve the group's liquidity, however the execution risks for the sale
are high and valuation and the timing are uncertain," says Martin Hallmark, a Moody's Senior Vice President and lead analyst for Thomas
Cook.
RATINGS RATIONALE
The rating action reflects the company's weakened liquidity profile, as well as a challenging market environment in the tour operator
business.
Given the high business seasonality, access to the company's GBP 875 million revolving credit facility is of vital importance for Thomas
Cook in order to overcome seasonal lows in the fiscal first and second quarters. As the result of weaker earnings in 2018, Thomas Cook's
cash of GBP 1 billion at 30 September 2018 was not enough to cover the negative free cash flow generation of the first quarter of fiscal
2019, which was about GBP 1.2 billion. Thomas Cook has operated with sufficient liquidity in the current fiscal year, however Moody's
considers that potential for further cash outflow in fiscal 2019 and reductions in the availability of short term financing could put pressure on
liquidity in fiscal 2020. Thomas Cook has no bonds maturing until 2022, but as of the end of March 2019 it had around GBP 100 million of
outstanding commercial paper: if this cannot be rolled over, it could further erode liquidity headroom.
After the weak first quarter of fiscal 2019 reported by Thomas Cook as well as further evidence of a challenging market environment in the
tour operator business, Moody's has revised down its base case expectations. Moody's anticipates only a minor margin improvement in the
coming 12-18 months and negative free cash flow generation in fiscal 2019, before the company can potentially reach cash break-even in
2020. Furthermore, Moody's expects the EBITA / interest expense coverage ratio to remain below 1.25x in the next 12-18 months and the
group's liquidity to deteriorate with very limited covenant headroom.
On 7 February 2019, Thomas Cook announced a strategic review of its Airline business in order to increase the company's financial
flexibility. All options are said to be considered including a full disposal of the Airline group, a partial sale or a sale of a minority stake.
Moody's believes that in the current environment an airline sale faces significant execution risks and can be a lengthy process with an
unclear outcome in particular in terms of the potential valuation.
Moody's review will focus on trading prospects for the summer season, which Moody's believes is critical to improve metrics, and on
prospects for liquidity, including an assessment of how the company plans to manage its seasonal financing requirements.
WHAT COULD CHANGE THE RATING UP/DOWN
If Thomas Cook's liquidity headroom is sufficient over at least the next 12 months, with adequate covenant headroom and the EBITA to
interest cover is on track to sustainably improve above 1.1x in the current financial year, the ratings might be confirmed. Failure to maintain
adequate liquidity and rebuild positive free cash-flow generation and improved interest cover could lead to a further downgrade.
The rating is weakly positioned and an upgrade therefore is not expected in the near term. Positive pressure would build if the company
sustainably and significantly improves its liquidity headroom, free cash flow turns sustainably positive, if Moody's adjusted EBITA/ interest
expense ratio increases towards 1.25x, and operating performance stabilizes or improves.