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Breakingviews - TUI equity call is probably a matter of when

TUI logo is seen at the TUI travel center following the coronavirus disease (COVID-19) outbreak, in Hanley, Stoke-on-Trent, Britain, July 28, 2020.

LONDON (Reuters Breakingviews) - “My father made him an offer he couldn’t refuse”. Unlike in the classic scene in the first “The Godfather” film, the German government did not have to threaten leisure travel giant TUI with violence, but the cash flow pressures from restrictions related to Covid-19 left Chief Executive Friedrich Joussen with little choice but to take the harsh terms on offer for an emergency loan.

The cash crunch is dramatic. Revenue in the quarter until the end of June was down 98%, and operating cash flow from operations for the first nine months of TUI’s fiscal year flipped from positive 617 million euros in 2019 to negative 2 billion euros. Business is starting up again, but bookings for the 2020 summer season up until the start of August were 81% below last year’s level.

Under such straitened circumstances, regular lenders are unwilling to jump in. But the German government-backed KfW is there to help. It has added 1.2 billion euros to an already arranged 1.8 billion euro credit facility. The money comes at a high cost. It will be senior debt and includes a 150 million euro convertible bond with a chunky 9.5% annual coupon and a conversion price roughly 34% below where shares currently trade.

Joussen now has enough funds to keep going until next summer, when he hopes business will be well on the way to pre-Covid levels. Bookings for summer 2021 are already up 145% from the current level, as holiday-deprived customers rebook. TUI targets a return to profitability next year and a “normalised level of demand” by 2022. It expects to be a post-crisis winner, as smaller rivals go to the wall.

Even if the recovery is extremely robust and reasonably fast, TUI’s present 5.8 billion euros of net debt is a heavy burden, above 5 times estimated 2021 EBITDA of 1.1 billion euros, according to Refinitiv data. Its target for that ratio is around 3. Unlike UK peer On the Beach, Joussen chose not to raise capital from shareholders in late May, when TUI’s share price was substantially higher than on Thursday morning, after a 3.4% drop. With a market value of just 2.3 billion euros, sooner or later TUI’s shareholders are likely to face their own hard-to-refuse offer of a dilutive equity issue.

Breakingviews

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