TUI Off To A Flying Start?: Allen & Overy advises TUI on the placement of 400m convertible bonds

May 4, 2021

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3 min read

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What's going on here?

On Tuesday 9 April 2021, Allen & Overy announced they had successfully advised tourism giant TUI on the placement of 400m convertible bonds. 

What does this mean?

This transaction will increase TUI’s liquidity by trading a bond (a security interest) in return for an immediate capital injection into the company. A convertible bond is a type of “hybrid” interest, giving investors a fixed-income debt security which can be converted into a predetermined number of shares. The number of shares per bond value is determined by the conversion ratio. For instance, a 6:1 conversion ratio would give the holder the chance to redeem six shares for every one bond held. In this way, the convertible bond is a useful tool as it allows the investor to redeem the share value of their investment if the company prospers, whilst retaining their capital plus interest if the company struggles. 

With this said, it is easy to see the upside of the deal. Through this transaction, TUI has now increased its cash flow to fight off the impact of COVID-19. TUI’s Chief Executive Fritz Joussen said the proceeds would be used “to further improve [the company’s] liquidity position, [and would also be put towards] the repayment of existing financing instruments”. However, the deal has also revealed strong investor confidence in the company, with the bond placement being oversubscribed (where investor demand outweighs the number of convertible bonds on offer). Whilst investor confidence is not a definitive statement of a company’s health, strong investor confidence is nonetheless a good indicator that the company is heading in the right direction post-COVID-19.

What's the big picture effect?

Whilst TUI’s successful allotment of 400m convertible bonds will undoubtedly bolster its financial position in the short-term, its long-term financial health remains questionable. This is partly caused by the uncertainty surrounding global travel. Whilst Transport Secretary Grant Shapps told ITV Morning that holidaymakers can “start to think” about booking summer holidays, this has not yet translated into an increase in demand for travel operators. In many ways, this is understandable. Monday 8 March 2021 saw the reopening of schools, and with multiple restrictions still in place, would-be holidaymakers are showing reluctance to book vacations. This is damaging for TUI and other aviation companies that have high fixed costs. Recent analysis from Berenberg has shown that TUI is burning through €250m-€300 a year. With such high costs paired with a slump in demand, it is easy to see how TUI’s recent convertible bond transaction might not completely save the company. 

To further TUI’s long-term problems the price of travelling is likely to rise. This price increase is caused by the UK’s testing programme that currently requires travellers to take a PCR test upon arrival in England. Each test costs £100, but the UK’s testing programme, including the tests, required pre-travel and pre-return could cost up to £306 per person. For a family of four, this adds over £1,200 to a family vacation. This would cause holidays to become unaffordable for many UK households and further dampen demand for companies like TUI. On top of this, Stuart Gordon, a leisure analyst at Berenberg Bank, points out that many holidaymakers this summer “will be using vouchers from last year, meaning cash to pay suppliers toward the end of the year could be tight”. 

On the whole, it must be said that TUI’s recent convertible bond transaction will give it a much-needed safety buffer over the next few months.  With summer around the corner, let’s hope consumer confidence returns so TUI can have the flying start it desires.

Report written by Luke Cuthbert

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