Cluster of hedge funds set to profit from Thomas Cook failure

LONDON (Reuters) - The collapse of travel operator Thomas Cook TCG.L is set to result in a bumper pay day for a clutch of hedge funds who bet the company's share price would fall.

Passengers are seen at Mallorca Airport after Thomas Cook, the world's oldest travel firm collapsed stranding hundreds of thousands of holidaymakers around the globe and sparking the largest peacetime repatriation effort in British history, in Palma de Mallorca, Spain, September 23, 2019. REUTERS/Enrique Calvo

Around 600,000 holidaymakers have been left stranded abroad after last-minute talks over a financial rescue package faltered, bringing to an end the company’s 178-year history.

After struggling for months under a crippling debt burden and market-related hits to revenues, it had agreed a rescue package with China's Fosun 1992.HK, only to see lenders demand the firm stump up more cash, forcing it into liquidation.

As a result of its long-running troubles, hedge funds had increased the size of their collective ‘short’ bets against the company, with funds including TT International and Whitebox Advisors together short nearly 7% of the company’s stock.

In a short trade, a hedge fund pays a small fee to borrow a company’s shares and then sells them into the market, hoping to buy them later at a cheaper price and return them to the original owner, pocketing the difference as profit.

When a firm goes bust, once the insolvency administrator has signed off on the collapse of the company their obligation to buy back the shares disappears and they can keep all the profit.

GRAPHIC-Thomas Cook shares:

Data from industry tracker Astec Analytics to the close on Friday showed that more than half the shares made available to borrow by long-term shareholders such as pension schemes was actually out on loan, with borrowing costs near a 12-month high.

A smaller group of funds had short positions in the company greater than 0.5% of its stock, and so were required to notify regulator the Financial Conduct Authority, among them TT, with 3.83%, and Whitebox, with 3.15%.

Other funds with large positions included Kite Lake Capital Management, with 1.3%; Melqart Asset Management, with 1%; Pictet Asset Management, with 0.51%; and Silver Point Capital, with 0.92%, FCA data to Friday’s close showed.

It was not clear how many hedge funds had a short position on the stock as not all are forced to disclose by name to the regulator. Nor is it clear how much each would have made, given the shares are often borrowed and sold over a period of time and at different prices.

Shares in Thomas Cook were priced at 3.4 pence a share when trading was suspended.

Holders of Credit Default Swaps (CDS), instruments used to insure exposure to credit, may also stand to receive a big windfall from their bets against the company. A panel of bankers will decide whether they will get paid out later on Monday.

GRAPHIC-Thomas Cook CDS:

Reporting by Simon Jessop; Additional reporting and graphics by Josephine Mason; Editing by Alex Richardson