Advisers had to bail out Eurotunnel rights issue: Morgan Grenfell and SG Warburg lent pounds 50m more at last minute

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EUROTUNNEL'S financial adviser, Morgan Grenfell, and SG Warburg, the banking arm of its broker, had to lend the Channel Tunnel operator the last pounds 50m of banking finance it needed before it could launch its pounds 858m rights issue and complete the pounds 1.6bn refinancing.

In the days leading up to the issue on 26 May, Eurotunnel told investment institutions it had raised the pounds 700m of banking finance necessary. But it had only raised pounds 693m from traditional banking sources, and some of that only came in on 25 May.

One source close to the refinancing said the pounds 50m loan was not agreed until the last minute and Warburg had to get Lord Cairns, chief executive, to approve it on the night before the rights issue was launched. According to the rights issue document, the offer to lend pounds 50m was only made on the day of the issue.

A spokesman for Eurotunnel said: 'We went out for it earlier than that, but a lot of the funding was not agreed until shortly before the rights issue.' He described the money as a top-up to be drawn if it was needed.

The fees agreed for this additional lending facility are extremely high. If the loan goes ahead, the two banks will be paid pounds 2.5m between them in the next few months. If it does not, they will get pounds 500,000.

A flat fee of 2 per cent, or pounds 1m, is payable when Eurotunnel signs the offer letter and a commitment fee of a further 2 per cent a year will be payable on the unutilised amount.

The two banks also stand to make a further fee of 3 per cent of the facility, pounds 1.5m, together with interest - planned to reflect the lenders' costs plus 4 per cent.

According to Richard Hannah, a UBS analyst and long-time Eurotunnel critic, the rights issue document reveals that the true cost of the project has now risen to more than pounds 11bn and not the pounds 10.1bn forecast by Eurotunnel.

'Adjusting for the leasing of rolling stock and exchange rate differences, the all-up funding requirement is in excess of pounds 11bn,' he said.

Mr Hannah said Eurotunnel was leasing pounds 672m worth of rolling stock it had previously planned to buy and was using an exchange rate of pounds 1 to Fr10 instead of the actual Fr8.5 rate when making its forecast of the project's total cost.

The rights issue document also shows that while Eurotunnel calculates it has raised pounds 419m more than it will need to complete the project - not including the extra pounds 50m - the banks estimate there is a funding margin of only pounds 34m.

Eurotunnel's estimate assumes that the banks agree to it leasing the rolling stock and that warrants issued last year are exercised.

Despite the creation of a new class of senior debt, as many as 150 of Eurotunnel's 220 bankers refused to sign up for the pounds 693m loan. The smallest 120 lenders only accounted for 10 per cent of the debt. The balance was made up by higher contributions from the remaining banks.

The original banking consortium has to approve the pounds 50m from Morgan Grenfell and SG Warburg.

Eurotunnel expects that claims against the British and French railways for their failure to meet promises could raise more than pounds 500m.

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