Tour operators across the UK are facing an uncertain future as the impact of 2018’s record-hot summer, years of weak currency and ongoing competition within the sector take their toll, according to Mark Benbow, co-manager of the Kames High Yield Bond Fund.
Last week Thomas Cook, the UK’s oldest tour operator, saw both its equity and debt fall to new multi-year lows – with a one-day drop of 15% for its share price – after its debt holders said they were making losses following a series of downgrades to its credit rating in recent weeks.
“Thomas Cook has faced some operational challenges of late which can be attributed to three key factors: last year’s hot British summer, persistently weak sterling and an increasingly competitive travel market,” Benbow says.
“This combination has put huge pressure on the business and has constrained free cash flow. Due to the way the operating model works, the business has a large working capital outflow in the first quarter of each year – something which requires a large revolving credit facility from which to access liquidity. With the news last week that banks are exiting their lines of credit at a loss, it creates uncertainty as to how Thomas Cook will fund these working capital outflows.”
Thomas Cook is now trying to exit its airlines business in an attempt to pay down debts, with the 7th of May reportedly the closing date for bids.
Benbow adds: “If the business is unable to generate enough money from this sale, it will require external funding, or else face the requirement to restructure.”
Thomas Cook is by no means alone in facing uncertainty. TUI is the next weakest in the market in terms of its debt, with its bonds also ranked as high yield, although it is still five notches higher than Thomas Cook (BB compared to B- currently for the latter).
“All tour operators are facing the same pressures, but none are quite as levered as Thomas Cook and so may still have some cash in the bank to tide them over during this drought,” Benbow says.
The Kames fixed income team is index agnostic, high conviction, bottom up driven investors. At the moment we have zero exposure to the travel space as we see better value elsewhere within global high yield.