Tui starts long road to deleveraging with third bailout

Tui starts long road to deleveraging with third bailout

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Stade, Germany - August 22, 2019: Signage at wall identifying a TUI travel agency. | OLIVER HOFFMANN/eyewave - stock.adobe.com

Travel company Tui announced its third bailout package since March on Wednesday, adding a substantial equity cheque to more state-backed debt, as troubled companies shift their focus from emergency cash to stable capital structures. A sharp rally in the company’s shares helped firm up the rescue package, but some questioned whether the new money will be enough.

The €500m equity raise will be used in part to pay off Tui’s €300m October 2021 bond, its first wholesale debt maturity, meaning the company will not have any maturities until 2022. Unifirm, the investment vehicle of Tui’s largest shareholder, Alexey Mordashov, has agreed to backstop the capital raise alongside underwriters Barclays, Bank of America, Citi and Deutsche Bank.

This was a condition of Tui’s last bailout, which featured a €1.05bn KfW loan. Bondholders, advised by Houlihan Lokey insisted on getting paid early from the proceeds of any equity raise larger than €150m, as well as adding other conditions, including a 3% consent fee, a coupon step from 2.125% to 9.5% and a quarterly cash penalty fee of 2% beginning in April 2. One of these firms was Astaris Capital Management.

The main elements of Tui’s previous rescue packages, loans from KfW and the German Economic Support Fund (WSF), were not allowed to be used for paying down existing debt, only for keeping the company trading, so the packages left the company still facing a refinancing problem.

Following announcement of the new equity raise on Wednesday, the bonds popped from around 97 bid pre-announcement to 100.50, according to MarketAxess’s BondTicker service.

At the beginning of November, they were bid around 85, having briefly traded above par following the package of consent measures in September.

The Tui rights issue is the result of months of work by banks coordinating with all the relevant parties in the deal.

Shareholders will be invited to subscribe for shares worth up to €500m.

The company’s largest shareholder, Unifirm, will fully commit to subscribing for its stake in the rights issue, worth 24.89% of share capital. It is also willing to subscribe for up to 36% of the deal.

Bankers on the deal are hopeful that support of the German government, as well as Unifirm is a sign that Tui’s shareholders will greet the rights issue warmly.

The company is also likely to benefit from an increase in interest in cyclical stocks, particularly companies that are set to benefit from the potential reopening of the global economy next year.

Before the rights issue announcement, Tui’s share price was up over 80% since the start of November when US drug company Pfizer announced a breakthrough in its efforts to produce a Covid-19 vaccine.

“It really has been a long deal in the making,” said a banker at one of the underwriters. “To get the various constituents aligned takes some time, especially to get the German government to come in with a big package as well as to get the biggest shareholder to support the deal at the same time; it was a lot of work. I think though the fact the government is participating says a lot, they really care about Tui.

“The raise is not a huge amount of the market cap and the largest shareholder is taking their stake and is prepared to go above that. The stock has also done tremendously well since the Pfizer news and the discount to the theoretical ex-rights price based of yesterday’s close is going to be in excess of 70%. It has all the hallmarks of a deal which should work.”

The rights issue is set to go ahead in 2021, after an extraordinary general meeting in January. Tui shareholders will be invited to subscribe for share at a price of €1.07 a share.

The other elements of the new bailout, alongside the capital raising, are a €200m secured revolver, an extension of KfW’s €500m unsecured revolver from April 2021 to July 22, a €400m state guarantee to release cash deposited with suppliers, and €700m of subordinated debt from WSF.

This is split into two instruments. First, a €420m convertible bond with a PIKable coupn, which can convert into 25% of the company, and second, a €280m hybrid with equity accounting, which can be increased in size if the share placing falls short. WSF will also gain two board members.

The new equity, alongside the state-backed convert and hybrid, start the deleveraging process, but questions still remain over whether the package goes far enough.

“Even in a bull case scenario where Tui benefits from barnstorming trading in summer 2021 on the back of a successful vaccine rollout, roll-back of restrictions and expression of pent-up demand, it seems fanciful to think it can generate enough cash to repay the KfW facilities by their maturity date,” wrote analysts at CreditSights.

Orphaned or not?

Research firm CreditSights raised the possibility that, with the 2021 bond repaid, Tui CDS would in practice be “orphaned” — meaning there is no debt deliverable into the contract.

Tui’s revolver and Schuldschein debt could in theory fit the bill, but if the documentation for those facilities can’t be made publicly available, the EMEA Determinations Committee cannot rule on deliverability, and therefore the loans might not make the list.

Loans to be delivered into CDS auctions need to be transferable, so restrictive provisions in an RCF might make it ineligible. CreditSights cited the Astaldi bankruptcy as an example of a situation where the EMEA Determinations Committee, which rules on CDS deliverability, declined to include the revolver as an obligation.

Schuldschein are technically bilateral loans, which can be traded, but which are not securities. Tui’s Schuldschein loans were likely issued before the Loan Market Association’s standard Schuldschein documentation was circulated.

“The first hurdle for deliverability analysis for any TUI Schuldschein will be if the documentation is able to be released,” said CreditSights. “If it is not publicly available (i.e. without the cover of a confidentiality agreement, the DC will not be able to analyse it”.

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