LONDON (Reuters) - Thomas Cook Group shares lost a quarter of their value on Friday and bonds hit a record low after Citi downgraded its rating to 'sell' and cut its target price on the stock to zero, in the wake of the company's latest profit warning.
Shares in the world's oldest travel company, battered by fading demand for its package holidays and high levels of debt, hit 12.1 pence, their lowest since July 2012, and were on track for their biggest one-day drop since November 2011.
Thomas Cook issued its third profit warning in less than a year on Thursday, saying discounting and higher fuel and hotel costs would hurt it during the peak summer season.
The company's gloomy outlook was echoed by British budget airline easyJet , which on Friday said it sees a worse trading environment than last year as worries over Brexit and economic weakness in Europe hurt consumer demand.
Citi said the Thomas Cook update might "unsettle consumers and drive further weakness in bookings."
Shares fell as much as 38 percent and were down 26 percent at 0943 GMT, wiping 78.6 million pounds off the value of the firm and giving it a market cap of around 223.75 million pounds.
The 2022 euro-denominated bonds fell 7 euro cents to 45.725 cents on the euro, their lowest on record and below 50% of face value.
"Debt markets are clearly highlighting the risk of financial distress and a debt for equity swap or substantial rights issue are both probable outcomes in our view," Citi analysts said in a note.
The cost of credit default swaps, a form of insurance against default, rose to 51% in upfronts from 48% on Thursday. CDS pricing indicated more than a 97 percent chance of default in the next five years.
Thomas Cook is exploring the sale of its profitable airline business in a bid to raise cash, and has received multiple offers from parties interested in buying the unit in whole or in part.
"We value the airline at an EV (enterprise value) of 592 million pounds," Citi said in the note. "We struggle to see the group receiving a high enough offer to prevent the deal being dilutive to earnings."
However, the note said a highly priced airline sale would not only provide relief from near-term pressure but might encourage a bid for the whole company from non-EU entities such as Fosun, Thomas Cook's top shareholder.
Airlines must be majority owned by European Union nationals to operate intra-EU flights so the disposal of the unit would be necessary before a takeover from a suitor such as Fosun.
(Reporting by Helen Reid and Alistair Smout; editing by Josephine Mason and Louise Heavens)