Eurotunnel’s battered investors seek light at end of debt crisis

By Jerome Glass

Date: 07/04/05

A Grand scheme to help bring the peoples of Europe closer together, or a huge hole in the ground into which billions of euro have been poured? For Europhiles and Eurosceptics alike, the Channel Tunnel serves as the perfect metaphor for European integration. For many of its investors, on the other hand, the Channel Tunnel has been a disaster.

It has now been a year since small shareholders ousted the board of Eurotunnel, the company which owns the tunnel and operates freight and passenger services through it, but there has been precious little improvement in the company's fortunes. Recent developments have only weakened it further. In January of this year it was hit with a triple blow as it announced a reduction in operating revenue and a fall in market share, which was followed swiftly by a downgrading of €1.2 billion of its debt to junk status by the rating agency Standard and Poor's.

Last week, an announcement from Eurotunnel's board that it would swiftly gain approval from its creditors to begin negotiations about restructuring its total €9bn of debt was quickly rebutted by the creditors themselves, who claimed that there were still many outstanding issues to be resolved before negotiations could even start.

Even without these setbacks, 2005 was always going to be a difficult year for Eurotunnel. Up until now, the company has been able to meet its interest repayments by issuing new debt, but this arrangement will end in December leaving Eurotunnel with huge cash demands. Its only viable solution is to attempt to reduce this debt as much as possible through a combination of write-offs and debt-for-equity swaps. The catch is that any substantial swap of debt for shares will leave the investments of its current shareholders worth practically nothing. And it is these small investors, mostly French, having already seen their shares drop in value by some 90% since they were first issued in 1988, who were behind last April's ousting of the board.

Following last week's embarrassment, there has been some good news for Eurotunnel. On Tuesday (5 April), it announced that it had secured the support of junior creditors to begin talk on its debt. But it does not yet have the go-ahead. For that, it will have to gain the support of three-quarters of its senior creditors who now have 30 days to cast their votes. Without progress on this front, Eurotunnel's long-term prospects appear pretty slim, bearing in mind the December deadline and that the board itself has stated that any restructuring negotiations are likely to take eight months.

If Eurotunnel does default on its debt, the creditors would be able to seize its prize asset - the tunnel itself, leaving the unfortunate Eurotunnel investors empty-handed. For them, the dream scenario would be for the governments to step in and bail the company out, something that they are expressly forbidden from doing according to the terms of the agreement they signed with the company in 1987, not to mention EU laws on state aid. As it stands, Eurotunnel's debt is what is preventing it from reducing prices and competing more keenly with ferries and low-cost airlines. There is, buried under the debt, the shell of a profitable company, the problem is how to get to it.

Article reports on the economic problems of Eurotunnel, the company running the tunnel linking France and Britain under the English Channel.

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