UK travel company Thomas Cook's inaugural visit to the debt capital markets proved a successful one. Its dual currency euro/sterling issue closed with impeccable timing, just before a Greek tragedy and a UK farce.
The relief in Paul Hollingworth's voice is tangible. The chief financial officer of Thomas Cook is explaining the timing of the UK travel company's successful inaugural bond issue to The Banker. The dual currency euro/sterling deal closed in mid-April, only weeks before the Greek fiscal crisis hit its nadir, sending shockwaves through European debt markets, and just ahead of the UK's inconclusive general election.
Such an uncertain set of economic and political fundamentals would not have been the ideal backdrop for an unrated UK travel company to pull off an inaugural dual euro/sterling bond deal. "We were unknown [to the debt markets], unrated and there were no [price] comparables," says Mr Hollingworth.
Fortunately for Thomas Cook, however, conditions were more benign in UK and European debt markets when the company toured the UK and Europe earlier this year garnering support for the capital raising. And garner support it did. The deal attracted £4bn (€4.6bn) and was eight times oversubscribed. Thomas Cook ultimately settled for a total of £650m. This was split between a €400m five-year tranche and a £300m seven-year tranche. Most of the proceeds of the deal will go towards refinancing a €1.8bn syndicated loan that matures next year.
"We needed to diversify our funding base away from pure bank facilities and extend our maturity profile," says Mr Hollingworth. He puts the deal's success down to a series of factors, not the least of which was "burnt shoe leather".
The firm travelled extensively throughout the UK and Europe and was undeterred by the challenges of raising money for the first time without a rating and in a market that has traditionally been sceptical of the travel industry. "It was a compelling story, a good name and a big group," he says.
Mr Hollingworth adds that he was also satisfied with the pricing the arranging banks achieved for the deal. The euro tranche carried a coupon of 6.75% and the sterling tranche 7.75%. Others in the market, however, have suggested it could have been tighter. The company was a debut, unrated issuer and the fact that the deal attracted an oversubscription of eight times suggests to some in the market the pricing could have been a notch or two tighter.
The job of pricing the deal was made even harder by the fact that bankers had no recourse to any immediate price comparisons in the travel sector. Added to this uncertainty was the knowledge that no unrated corporate had tried to bring a dual currency deal to market in recent memory.
Ratings deadline
Given Thomas Cook's unrated status, the arranging banks inserted several covenants, including one that guaranteed a step-up of 125 basis points on the coupons if the company does not obtain two ratings when the first interest payment is due in April 2011.
Thomas Cook's debut in the debt markets has proved a successful one and begs the question why the travel company has never considered this option before. "We've only been a public company for three years and we typically run with an un-geared balance sheet," says Mr Hollingworth.
This deal, he says, was all about diversifying the firm's funding sources. Looking to the future, Thomas Cook does not plan to tap the debt markets again anytime soon. "We've sorted out our requirements for now, but we've opened the debt markets up for any future issuance," he says.
Barclays Capital, Commerzbank, HSBC and Société Générale ran the book for the euro tranche, while Barclays, HSBC, Lloyds Banking Group, ING Bank and RBS co-managed the sterling portion of the deal.
