New financing plan is only way out for Eurotunnel backers

Date: 26/06/1997

By Bruce Barnard

THE fate of the beleaguered Channel Tunnel could be sealed early next month when shareholders vote on a controversial 12.8-billion-ecu debt-rescheduling plan.

The vote at the Palais des Congres in Paris on 10 July could go either way, as it is impossible to gauge in advance what stance the 750,000 small shareholders who own three-quarters of Eurotunnel, the Anglo-French tunnel operator, will take. Moreover, the meeting requires voters representing 25&percent; of the shares to be present to achieve a quorum.

This fifth restructuring of Eurotunnel has cast a long shadow over the EU's promotion of public/private financing of large cross-border infrastructure projects at a time when government investment in transport is slipping in most member states.

The Paris showdown is the climax of months of tortuous negotiations following Eurotunnel's decision 18 months ago to suspend daily interest payments of 2.9 million ecu. Lenders have been given last-minute details of the restructuring at briefings in London, Paris, Frankfurt, Milan, New York and Tokyo over the past two weeks.

But Eurotunnel's fate does not only rest with the shareholders. It will also be decided in Brussels, where the European Commission is poised to rule on some key competition issues which could make or break the company's ability to take on its ferry rivals.

Eurotunnel got its first break in months last week with the resumption of freight shuttle services for the first time since a fire last November which raised serious questions about the tunnel's safety.

In many ways, the tunnel was a role model for the Union's Trans-European Networks: it was a genuine cross-border project which showed private investors were prepared to fund projects which traditionally were the preserve of governments. It created tens of thousands of new jobs, gave Europe a cutting edge in tunnel technology, promised a substantial shift of freight from road to rail, caught the public's imagination and gave a financial stake to thousands of ordinary people.

But Eurotunnel has been a commercial disaster from the very outset. Its 1987 share prospectus forecast a profit of just over 500 million ecu for 1997 - instead it is looking at a loss of some 478 million ecu.

The tunnel opened two years late at a cost of nearly 14.5 billion ecu, compared with the original estimate of 6 billion ecu.

Traffic forecasts were hopelessly optimistic and Eurotunnel seriously underestimated the determination of the ferry operators to defend their market.

Eurotunnel's long-suffering shareholders will have to wait a lot longer to be rewarded for their loyalty. The company says that if the refinancing is cleared, it expects to pay its first dividend in 2006 - a year after it breaks even. But analysts say the payment could be delayed until 2010 or later if its traffic forecasts prove over optimistic.

Eurotunnel's current financial problems will, however, pale into insignificance if shareholders spurn the restructuring plan.

The company is likely to be liquidated, creating a nightmare for bankruptcy lawyers as they confront widely different French and British commercial laws.

Eurotunnel's small shareholders have one overriding reason to back the refinancing plan: there is no viable alternative.

Patrick Ponsolle and Robert Malpas, Eurotunnel's co-chairmen, have warned that a 'no' vote will probably leave shareholders with nothing. But a 'yes' vote will still leave them nursing massive losses.

Many of the French shareholders invested their retirement savings in the tunnel, convinced their government would never let a grand projet founder. The value of their shares has been decimated and the refinancing plan would erase more than half of their funds and leave the banks holding around 60-75&percent; of the equity.

While the majority of small shareholders have hung on to their shares, some of Eurotunnel's 225 banks have been bailing out, disposing of their debts by selling them under the contract.

An estimated 10&percent; of Eurotunnel debt has changed hands, at around 45&percent; of its face value, cutting the number of creditor banks to some 174. American banks which held only 4&percent; of Eurotunnel's debt in July 1995 now account for nearly one-quarter.

The 20-bank steering committee which forged the restructuring plan was prepared to use strong arm tactics to get the backing of reluctant banks, even considering revealing the names of the banks which were not playing ball or exerting pressure that could affect their future operations in France and the UK.

As the crucial vote nears, the banks are preparing to seek a so-called substitution which would allow them to declare the shares worthless if the refinancing plan is rejected - or they may attempt to appoint a new company to operate the tunnel.

This would stop them being sucked into a legal quagmire of conflicting British and French insolvency laws.

The European Commission threw Eurotunnel a lifeline recently by raising serious doubts over a planned merger of the cross-channel ferry operations of P&O and Stena of Sweden.

It is not the Commission's decision, but its timing that is critical. The institution says that it will clear the 60-40 P&O/Stena joint venture if it is run separately from its parent companies' other businesses.

But what Eurotunnel wants is the Commission ruling to be delayed beyond the peak summer season in July, which would give it valuable time to boost its market share.

The ferry lines have got the green light from Paris and are confident that the new British government will soon approve their deal.

Meanwhile, the Commission's delay in clearing the sale of British Rail's tunnel freight unit, Railfreight Distribution, to the US-owned English, Welsh & Scottish, has fanned fears that customers will sign long contracts with ferry operators.

France's state railway SNCF, Transfea (a Spanish transport concern) and Freightliner (a British rail freight operator) have complained that the 725-million-ecu sweeteners given by the previous British government to accelerate the sale contravened state aid rules.

But while Eurotunnel's immediate future will be settled in Paris and Brussels, its long-term survival will be determined in the market-place.