A European committee decided that British travel group Thomas Cook’s forced liquidation Monday has triggered a bankruptcy credit event, requiring the iconic company to remunerate buyers of credit default protection.

The EMEA (Europe) Determinations Committee (DC) of the International Swaps & Derivatives Association (ISDA) has ruled that the global travel firm suffered a credit event related to each of its 2014 and updated 2003 transactions.

The DC noted that the credit event only applied to credit derivative deals with a scheduled termination date falling on or after September 23, 2019, and any transaction slated to terminate – in particular, September 20, 2019 – would be out of the scope of its decision.

The DC also made a separate determination with respect to Thomas Cook’s Chapter 15 filing earlier in September with the U.S. Bankruptcy Court for the Southern District of New York.

Given the DC’s ruling, Thomas Cook is reportedly due to pay its credit protection holders, or owners of credit default swaps (CDS), a total of around US$250m, including to hedge funds such as UK-based Sona Asset Management and Munich-headquartered XAIA Investment – both of which are said to have gambled on the company’s ultimate collapse.

A CDS is a financial derivative that acts as a type of insurance policy. In a typical contract, a seller of credit protection has swapped out the default risk of some reference entity’s credit obligation, such as a company loan, for a premium. The owner of the swap is then reimbursed should a credit event occur, as determined by ISDA – which generally occurs when the borrower has defaulted.

According to figures from the Depository Trust and Clearing Corporation (DTCC), Thomas Cook had an average of US$10m worth of daily net notional CDS over the three-month period beginning March 20, 2019, through June 19, 2019, with more than 95% of those contracts carrying restructuring clauses.

DTCC notes that this notional represents the amount executed across the entire maturity spectrum and not the average amount traded at each maturity point or the amount traded at the five-year point.

Gates Closed

Meanwhile, ISDA’s ruling followed Thomas Cook’s statement Monday of its compulsory liquidation.

Peter Fankhauser, chief executive at Thomas Cook, said that his company had “worked exhaustively” to resolve the outstanding issues. However, although a deal “had been largely agreed, an additional facility requested in the last few days of negotiations presented a challenge that ultimately proved insurmountable.”

Fankhauser added that it was “a matter of profound regret to me and the rest of the board that we were not successful.”

UK Prime Minister Boris Johnson reportedly rejected Thomas Cook’s request for a £150m taxpayer bailout, citing ‘moral hazard’ – or averting setting a precedent should other companies fail in a similar manner.

The 178-year-old firm’s collapse resulted in over 21k lost jobs and roughly 600k stranded vacationers, 150k of which were said to be domiciled in the UK.

Thomas Cook, which has confirmed that all its UK companies have ceased trading, including Thomas Cook Airlines, said that all flights provided by these companies had been canceled and are no longer operating.

The company noted that the Government and the Civil Aviation Authority are “now working together to do everything we can to support passengers due to fly back to the UK with Thomas Cook” between September 23, 2019, and October 6, 2019. 

Thomas Cook also said that an application was made to the High Court for a compulsory liquidation of the company, with members of AlixPartners UK to be appointed as Special Managers. The company further expects that AlixPartners UK will work “very closely” with the Civil Aviation Authority in the UK, to affect the repatriation of all impacted UK customers. 

The firm has further requested that its ordinary shares be suspended from listing on the premium segment of the Official List of the FCA and from trading on the main market of the London Stock Exchange with immediate effect.

Red Flags

In its half-year 2019 financial results, Fankhauser said the period was “characterized by an uncertain consumer environment,” amid “little doubt that the Brexit process has led many UK customers to delay their holiday plans.”

Thomas Cook suffered a £1.4bn loss from operations over the period, reflecting a non-cash impairment of historic goodwill, largely related to its merger with MyTravel in 2007.

Fankhauser added that the company’s trading position reflected “a slower pace of bookings, against a strong first half in 2018, and our decision to reduce capacity.”

In mid-July, Thomas Cook said it was in advanced discussions with its largest shareholder, Fosun Tourism Group (about 18%) and its affiliates, as well as its core lending banks to secure a £750m injection of new money, “which would provide sufficient liquidity to trade over the Winter 2019/20 season and the financial flexibility to invest in the business for the future.”

The firm said that at completion, “the new money would comprise a capital injection and new financing facilities.”

Against this backdrop, many CDS holders had become jittery, as Thomas Cook later said its proposed recapitalization would require a reorganization, which would result in “substantial deleveraging,” entailing conversion of £650m of its external bank debt and €1.15bn worth of bond debt into equity.

As of September 20, Thomas Cook’s stock had fallen more than 94.35% to £3.45 from its latest 52-week high set September 27, 2018.