Thomas Cook Tumbles on Downgrade Showing Default Is Possible

May 23 2019, 8:57 AMMay 23 2019, 11:55 AMMay 23 2019, 8:57 AMMay 23 2019, 11:55 AM

(Bloomberg) -- Thomas Cook Plc’s battered shares sank almost 10% on Thursday after the U.K. travel company’s debt rating was cut to a level indicating default is a real possibility.

The stock fell to 11 pence early in London trading amid fresh questions about whether the world’s oldest travel agency can turn itself around. Earlier, both S&P Global Ratings and Fitch Ratings cut the company’s credit score deeper into junk territory, citing weak trading and high levels of indebtedness.

Earnings may continue to deteriorate and the company’s debt pile could rise to an “unsustainable” level, S&P analysts said, putting the rating at CCC+. They also echoed doubts from Citigroup Inc. analysts over how much money it could raise selling its airline division.

Thomas Cook’s lower credit score adds to the woes of a company whose shares have dropped 75% in the past six months as it grapples with a tough business environment for the European travel industry that’s also knocked rivals including TUI AG. Thomas Cook’s airline, which carries 20 million passengers annually to sunspots around the Mediterranean, is crucial to its survival because a new 300 million-pound ($379 million) loan announced last week is conditional on making progress on its sale.

The airline may not attract as high a price as management hopes because of “overcapacity” in the discount-carrier sector, S&P said in its report late Wednesday. Rival Ryanair Holdings Plc Chief Executive Officer Michael O’Leary was even more blunt this week, referring to Thomas Cook’s airline as a “dog” which is worth little beyond the value of its airport landing slots. Citigroup analyst James Ainley, who has predicted a company-wide debt restructuring may be necessary, estimates the airline is worth about 400 million pounds or less after aircraft-lease debt is repaid.

Thomas Cook has bank debt as well as 1.15 billion euros of bonds, which fell about four cents on the euro to 35 cents on Thursday, near a record low, according to data compiled by Bloomberg. The notes were quoted at face value as recently as November, when the company announced a profit warning after a freak summer heatwave prompted many of its northern European customers to stay home.