Lessons to learn from the Thomas Cook collapse

Unserviceable debt levels were largely to blame for the failure

Lessons to learn from the Thomas Cook collapse

Insurance News

By Nicola Middlemiss

Late last month, travel giant Thomas Cook became the latest major company to collapse, after it failed to secure final terms on its recapitalisation and reorganisation.

“It is a matter of profound regret to me and the rest of the board that we were not successful,” chief executive Peter Fankhauser said on September 23.

“I would like to apologise to our millions of customers, and thousands of employees, suppliers, and partners who have supported us for many years,” he added.

The news came as a shock to thousands of stakeholders – including countless small businesses which depend on Thomas Cook to keep their own operations afloat.

“There are a large number of small businesses whose fates depend on Thomas Cook, especially in Mugla, Dalaman and Fethiye,” said Osman Ayik, the chairman of Turkey’s Hoteliers Federation.

Ayik added that some small hotels in Turkey are still owed around £100,000 – £200,000 (AU$180,000 - $460,000) for their involvement in Thomas Cook holiday packages.

Christos Efstathion, GM of the Napa Plaza hotel in Cyprus, also said his organisation was at risk of significant losses following the announcement.

“It’s a big anxiety...it’s not only the current guests, it’s how to deal with the immediate, medium and long-term future for the hotel,” he told ADP News, adding that the hotel had 300 separate nights booked through Thomas Cook in October.

While many of the businesses affected had no idea Thomas Cook was in trouble, it seems there were countless signs internally which pointed to the company’s likely fate.

Among them was the £1.7billion debt being carried by the firm, which was also waiting for approval of a £200 million recapitalisation request and a £900 million injection of new capital.

“Debt-laden businesses are more vulnerable to unexpected bumpy conditions and sudden business shocks,” said Mark Hoppe, MD of trade credit insurer Atradius.

“It’s very important for businesses to keep a close eye on their debt-to-income ratio, which is a measure of the amount of business income being spent on debt each month.”

In fact, while the situation has caused huge stress for countless stakeholders, Hoppe said it can also be used as an opportunity for brokers to discuss savvy vetting of customers and clients.

According to Hoppe, there are several indicators which can provide early warning that a company could be in trouble.

“If the business catches those signs early enough, it could be able to avoid or reduce the amount of money owed if the buyer does become insolvent,” he said.

The signs include:

  • Too much debt: like Thomas Cook, if the company has a high DTI ratio that it can’t service, it will likely drown under the weight of its debts.
  • Over-expansion: expanding too quickly or taking on too much debt to expand is risky even if the business owners are highly experienced.
  • Lack of clarity: business owners should be able to clearly articulate how the business generates cash.
  • Qualified accounts or going concern commentary: businesses that are in trouble may have qualified accounts, which are audited accounts where the auditor has doubts about the company’s management.
  • Going concern commentary is less serious but shows the auditor is protecting themselves from litigation while still signing off on the accounts.
  • Profit warnings: a profit warning is the clearest sign that a company won’t meet its earning expectations.
  • Profit versus cashflow: a company showing strong profits but little cashflow may be doing some dishonest accounting.
  • Irregular payments: if the company can’t pay debts and invoices regularly or on time, or even if the company can pay but does so in lump sums after periods of non-payment, then cash flow is likely compromised.
  • Unstable leadership: many changes within a company’s leadership is a sign of trouble.
  • Trappings of success: if directors have expensive cars or furnishings it could mean they’re rewarding themselves at the business’s expense. This isn’t necessarily a sign of trouble but, if any of the other signs are present, it could warrant further investigation.
  • Late filing of accounts: companies that file their accounts late are either disorganised or had trouble getting the auditor to sign off. Either reason is cause for concern.

“Businesses shouldn’t overreact if they see one or two of these signs but if they see more, or if the circumstances are severe, then it could be a sign that the business really is in trouble,” said Hoppe.

“If the business under consideration is a potential customer, three or more of these signs could be a good enough reason to do further due diligence or decline to do business with that organisation.”

Hoppe also noted that if a director is seeing these signs in their own business, they should definitely investigate further and, if necessary, appoint an independent auditor.

“Recognising the warning signs is just the first step; it’s essential to act on these signs to avoid undue business risk and also look at cash flow management strategies like trade credit insurance to protect the business if a buyer does become insolvent,” he said.

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