Thomas Cook was held back last night as traders sold out on the view that the market may be underestimating the FTSE 100-listed tour operator's refinancing needs.
Morgan Stanley sounded the alarm, saying that factors such as adverse currency movements, higher than anticipated exceptional costs, the weakness in working capital and the money spent on acquisitions meant that the level of cash generation had been weak and Thomas Cook's debt position had worsened. Coupled with lower interest income on customer deposits, the broker said net financial charges had been rising at a faster than expected pace, something which is likely to continue into 2010.
"The company has 3 times adjusted gross debt/EBITDAR versus [a covenant of 3.75 times], but this covenant will fall to 3.5 times on March 31 2010 and then to 3.25 times on September 30 2010. This means EBITDAR needs to drop by just 10 per cent to hit the covenant," Morgan Stanley explained, saying that the step downs suggest that the company may have to refinance its May 2011 bank facility sooner than it currently seems.
"It could no doubt roll over some of its existing facility and could raise a convertible [bond]. It only expects an extra £10m [in] net financial costs from the refinancing, but given that [TUI Travel, which recently refinanced its loans] has double this cost from half the facilities, this may be optimistic," the broker added, saying that there was a "reasonable risk" of the group resorting to a small equity raising to pay off the loans before the covenants tighten.
Besides its assessment of Thomas Cook's debt position, Morgan Stanley also turned more cautious on tour operators more generally, moving Thomas Cook, which was 4.3 per cent or 9.3p weaker at 209.2p, to "underweight" from "equal weight" and TUI Travel, which was 4 per cent or 10.2p behind at 245p, to "equal weight" from "overweight".
Overall, the FTSE 100 was un-moved by the day's activity, edging lower by 16.29 points to 5251.41. The FTSE 250 fared slightly worse, easing by 69.3 points to 9167.6. Traders were cheered by a new circular from Goldman Sachs strategists, who said that while many have worrying about a pullback in the markets as we approach the end of the year, historical data suggested that equities may in fact trade higher. "December stands out as one of the best months for equities using both long and short-term data," they said. "We think this year will be similar. In years when the first 11 months have yielded good returns, December has tended to be particularly strong."
Turning back to the day's movements, and parts of the mining sector rebounded, as bargain hunters sought to capitalise on Thursday's looses. Antofagasta, up 10.5p at 901p, was among the biggest beneficiaries of the trend, while Fresnillo rose to 875.5p, up 4p. Lonmin was 8p ahead at 1693p, but Rio Tinto was among the laggards in the sector, losing 36p to 3148p, as its Cloud Peak unit fell in early trading as it debuted on the New York Stock Exchange.
Elsewhere, Cadbury was 9.5p heavier at 800.5p as new reports suggested that in the event of a joint bid from Ferrero, the Italian chocolate manufacturer, and Hershey, the American confectioner, the Italians may end up taking over the British group's gum and candy business. Renewed bid talk was also evident around Centrica, which was broadly unchanged at 258.4p, down 0.1p. Gazprom was once again mooted as a possible suitor, although traders continued to play down the story. Similar factors were at play around International Power, which lost 1.1p to 269.4p, even as speculators pegged their hopes on a bid. The rumours were vague, and bore no clues about the identity of the prospective suitor.
Severn Trent was 1.5p firmer at 996.5p following some words of support from Nomura, which said it preferred the stock to Pennon. "There were few small positives from [Pennon's half-year results on Thursday], but not enough, in our view, to warrant such as strong positive reaction from the share price on the day," the broker said, maintaining a "reduce" stance on Pennon, which nonetheless rose by 2p to 487.8p.
On the second tier, National Express raced ahead, strengthening by 7.6 per cent or 25.9p to 366.9p, after it emerged that the Cosmen family had raised its stake in the transport group, with Jorge Cosmen buying just over half a million shares at 341p apiece. The Spanish family, which had earlier thrown its weight behind an approach from Stagecoach, now owns 18.97 per cent of the company.
Further afield, Derwent London was 39p weaker at 1032p as UBS weighed in on the commercial property group's interim management statement, which was issued earlier this week. "We believe the focus forward for [the company] will be when it will state some of its projects within its major potential pipeline and whether it can make any attractive acquisitions," the broker said, raising its target price for the stock to 1270p from 1125p. UBS maintained its "sell", however, citing its cautious outlook on the UK economy and the London office rental market.