Fitch: No Rating Impact on Thomas Cook From Fosun's Proposed 5% Equity Stake
We view the strategic partnership with Fosun as mildly credit positive for TCG, given the immediate cash injection of GBP91.8m strengthening the group's financial flexibility. While the initial equity stake and absolute cash inflow are relatively small, we believe there is a strategic rationale and enhanced business opportunities over the medium term as the cooperation between TCG and Fosun's travel and leisure businesses continues to develop.
Over the rating horizon, we expect improved utilisation of TCG's distribution platform, better product offer and enhanced geographical diversification of its customer base by tapping into the fast-growing Chinese domestic and international tourism market. This should underpin revenue and profitability growth in the medium term.
We continue to believe that despite a recent improvement in trading and the established brand, conditions in the travel industry remain intensely competitive across many markets and will limit the momentum of TCG's turnaround plan. In this context, the ongoing benefits from cost savings, greater online penetration and the growth opportunities from the strategic partnership with Fosun, translating into enhanced funds from operations (FFO) and continuing positive free cash flow will be key factors supporting positive rating action.
While TCG could use some of the new money to reduce its debt burden, we do not expect any material deleveraging given its high debt on balance sheet of GBP1.35bn (even unadjusted by operating leases) as of September 2014 - increasing to over GBP2bn factoring at least GBP700m for working capital requirements intra-year. We continue to forecast group-adjusted FFO gross leverage of around 6.0x at FYE15 (including working-capital swings), higher than 5.0x considered a more comfortable level compatible with a higher rating given the inherent business risks.
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