Thomas Cook cleared another hurdle on the way to a £1.1 billion rescue deal last night by filing for Chapter 15 court protection in the United States.
It ensures that €1.15 billion of bonds issued under US jurisdiction can form part of the proposed debt restructuring on which the 178-year-old travel group’s survival depends. Any challenges must now be dealt with under British law.
The embattled company confirmed yesterday that it had filed court papers in the federal Southern District of New York. It was represented by Latham & Watkins, the law firm.
Chapter 15 protects foreign companies from legal action by American creditors during a corporate restructuring taking place outside the US. Like Chapter 11 for American companies, it gives a business breathing space to complete a reorganisation.
In the case of Thomas Cook, the filing is particularly significant as it may trigger a payout of default insurance on the holiday company’s debt. Hedge funds, including Sona Asset Management and XAIA Investment, have threatened to vote against the restructuring unless the insurance pays out. They would need to muster 25 per cent of the votes to put the rescue at risk.
Credit insurance pays out to bondholders in the event of default. The hedge funds were concerned that they would have been unable to claim payouts from their insurance under the proposed debt-for-equity swap.
Although securing Chapter 15 protection could mean that the credit default swap-holders end up being paid out, it is up to Thomas Cook to decide whether to trigger the payout and the company appears to be keeping its options open to give it a strong hand in the final restructuring negotiations.
A source close to one hedge fund said: “We do believe that there are some very strong arguments why a Chapter 15 filing should trigger CDSs. Unfortunately, Thomas Cook is not being very co-operative. It’s easy to blame others for being the bad guy.”
Thomas Cook, which dates back to 1841, is one of the world’s largest holiday businesses, with 21,000 employees in 16 countries and more than 22 million customers every year. Its debts have left it vulnerable to the weather and to political and economic turmoil, forcing it to accept a rescue deal led by Fosun Tourism Group, of China.
On Monday, Thomas Cook secured extra time to agree a deal after the critical bondholder vote that had been due to be held today was delayed until September 27.
As well as enabling it to address the credit default swaps issue, the delay gives it a few extra days to expand the rescue deal from £900 million to £1.1 billion to satisfy the demand from its lenders, led by Royal Bank of Scotland and Lloyds, for a further contingency.
Although the extra £200 million is not expected to be drawn down, it provides Thomas Cook with further liquidity headroom over the winter, the traditional low-cash period for tour operators as they pay out the cash due to hoteliers and other suppliers that they worked with over the summer.
The company said that it was continuing to “target implementation of the recapitalisation in early October”.