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Banks face EIB cash call

Eurotunnel: Financial crisis takes a new turn as lender demands payment of loan guarantees
Bank lenders to Eurotunnel are being forced to bail out the European Investment Bank, which was one of the major backers of the project.

It emerged in letters to banks sent over the weekend that a substantial part of the EIB's loans of pounds 300m was guaranteed by other bank lenders in the syndicates.

The guarantees are being called in this week, and as a result other lenders will have to take over the burden.

The demand, triggered by Eurotunnel's unilateral suspension of interest 10 days ago, has caused alarm among Japanese banks involved in the Eurotunnel syndicates, since they are weighed down by domestic bad debts and could have problems in raising the funds.

The bad blood caused could make it hard to reach agreement on financial restructuring and could lead to calls from Japanese banks for government intervention.

At the end of last week, Eurotunnel was given formal notice that the EIB would be making an initial demand for the guarantees to be honoured and the money to be repaid.

It is understood that only two classes of lender in the syndicate of 225 are affected, and that the EIB will be remain a lender to Eurotunnel, but on a smaller scale.

The call from the EIB comes as Eurotunnel's main bankers expressed the view that they believed shareholders in the project should suffer some dilution.

In a letter to Eurotunnel's 225 bankers the four agent banks, NatWest, Credit Lyonnais, Midland and Banque National de Paris explained why they had been unable to come to an agreement with Eurotunnel on a financial restructuring.

In the most forceful terms they have used since the project began, they describe Eurotunnel's proposals that were put to them earlier this month as "unbalanced and unacceptable".

They described how the refinancing package presented to them involved very considerable pain for the banks by way of forgiveness of interest, which would not be recovered, yet at this stage no "defined pain" for other stakeholders.

The letter says: "We continue to be of the opinion that any pain must be shared by all stakeholders. We question whether it is reasonable to expect the Banks to assess the amount of pain that they should take without a clear idea of what contributions [if any] might be expected from other interested parties. Moreover, banks would have been asked to decide on the basis of Eurotunnel's recent short term revenue forecasts which are markedly adverse compared to previous company forecasts."

The letter to Eurotunnel's bankers says that the company presented to the leading bank a three-year plan for the years 1996-1998 which showed much lower revenue forecasts in these years than previously assumed by the company.

The letter refers to a forecast of a funding shortfall in the region of pounds 7.5bn which might have been exacerbated by the compounding of interest over many years.

The banks say that the biggest change to the funding situation comes as a result of lower revenue forecasts, especially over the next three years, which on its own increase the shortfall by more than pounds 6.2bn. They also note that the depreciation of the pound against the French franc resulted in an increase in the funding shortfall of around pounds 0.4bn, although this has been offset to some extent by new economic forecasts and revised operating and capital spending forecasts.

The agent banks state that early this month Eurotunnel proposed a combination of measures, including a fixed-rate interest coupon at below cost of funds on the whole of the junior debt, for a period of five to six years, and interest deferral. They said the aim was to enable the company to raise money on the capital markets or the equity markets in order to pay back the banks early in the next decade.

The agent banks say that they rejected this proposal because it did not seem to them to involve pain for other stakeholders such as the company's shareholders.

The letter to the bankers illustrates how sensitive the project's economics are to small changes in revenue.

For example, the banks say that if they were to use Shuttle revenue figures of 10 per cent higher than those forecast by the independent forecasters, the funding shortfall would be reduced to pounds 3.7bn with a final repayment in 2026, with the date of maximum indebtedness being in 2008.

If those same revenue figures were 10 per cent lower than the forecast, this would increase the funding shortfall and would make it impossible to repay total debt and accrued interest until 2052.

The agent banks say that previously they had proposed to Eurotunnel that there should be an interim solution that would consist of an interest capitalisation arrangement for a period of up to two years.

This proposal, they say, would have been part of a package in which the banks would be asked to dispense with default interest but might receive equity later on as part of the unpaid interest.

The agent banks add that their proposed interim solution would not have prevented the company and its bankers from finding a longer-term solution to its problems but would have had the advantage of providing a more defined and managed short-term situation than that is provided by the existing standstill arrangements.

The letter says that the standstill eventually does provide a period of stability for the company which remains of crucial importance.