Fears were mounting on Tuesday about Thomas Cook (TCG.L)’s large debt and the possibility it may need to raise new capital.

Thomas Cook’s share price has tanked by 60% since last week after it issued its second profit warning in a month and scrapped its dividend. The stock fell by over 20% on Monday and fell 13% on Tuesday, before recovering.

The price of Thomas Cook credit default swaps (CDS), a kind of insurance against defaulting on debt, spiked on Tuesday. The current price now implies a 60% probability that Thomas Cook will default on its debts.

“Thomas Cook’s debt is trading like distressed junk, suggesting it’s in serious trouble as a result of a litany of mistakes and problems,” Bill Blain, a strategist at Shard Capital, told Yahoo Finance UK.

Burnt by a hot summer

In an update last week, Thomas Cook blamed a prolonged summer heatwave for poor sales and profits. The company said that people across Europe delayed booking holidays as a result of the weather.

However, Berenberg analyst Stuart Gordon and his team said in a note last Thursday: “While its performance has undoubtedly been affected by the weather, we fear that this is merely papering over the cracks of a structurally challenged business model.” Gordon and his team branded Thomas Cook “uninvestable.”

The travel and airline industry has been hit by Brexit fears, the fall in the pound since the 2016 referendum, terrorism fears, rising fuel costs, and pressure on margins in recent years. Several airlines have gone bust, including Monarch, Primera Air, and Cobalt.

‘Investors worry that they might need to raise extra capital’

Following its share price decline, Thomas Cook, which both arranges package holidays and operates an airline, is now valued at around £300m ($382m). That is down from over £2bn earlier this year and less than its £389m debt pile.

The debt pile, disclosed last week, was bigger than investors expected, which further hit confidence. Investors fear the company will likely now have to raise more money to service its debt and fund a turnaround.

“The cost of their debt is trading at 70% of face value, as investors worry that they might need to raise extra capital,” Michael Hewson, chief market analyst at CMC Markets, told Yahoo Finance UK.

Shard Capital’s Blain said: “The current pain has been magnified because the bond market is extremely thin at present and any bad news is being exaggerated.”

Michael van Dulken, head of research at Accendo Market, said Thomas Cook will likely now need to raise fresh capital but said the options are all unattractive.

“Any rights issue would surely have to be highly dilutive, merely dealing another blow to the share price,” van Dulken said. “Any borrowing or additional credit facilities surely wouldn’t come cheap. Any need to dispose of the airline division (more profitable than travel in its recent update) might be seen as selling the family silver.”

Still, analysts are reluctant to predict the collapse of Thomas Cook.

“Its bad, but not so bad it’s about to fold,” said Shard Capital’s Blain, adding that management changes were needed to turnaround the company.

CMC Market’s Hewson said investors are “very worried” but added: “We’re not at peak pessimism yet, which is where we were in 2011 when Harriet Green turned the business around, but the speed of the falls is worrying.”

Thomas Cook’s share price collapsed 92% in 2011 but avoided collapse thanks to a £1.4bn emergency loan.

That management at the company are meeting with investors this week to reassure them. The stock rallied in late trade on Tuesday and ended just over 1% higher.

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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.

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