Banks face pounds 1bn Tunnel write-off

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The Independent Online
BRITISH banks are set to write off up to pounds 1bn this year against loans to Eurotunnel, the Channel Tunnel operator struggling to refinance its pounds 8.5bn debt mountain.

The bloodbath could significantly dent the bottom-line results of some of Eurotunnel's biggest lenders, including National Westminster, Midland and Barclays.

Industry sources say British-based banks, including the main clearers, merchant banks and foreign bank subsidiaries, may hold up to 20 per cent of the debt, more than previously thought.

And with Eurotunnel loans trading at around 35 per cent of face value in distressed debt markets, banks may be forced to write off up to two- thirds with their 1995 results season just weeks away.

That would mean a bill of around pounds 1bn for UK financiers and over pounds 5bn for Eurotunnel's 225 banks worldwide as thanks for their eight-year backing of the Anglo-French project.

"Many of the banks will be making provisions in their 1995 results because that's the prudent course to take. Any responsible bank would," said a senior source at one of Eurotunnel's leading UK lenders.

Eurotunnel shares hit an all- time low of 77p last week on rumours of bankruptcy before a meeting in Calais on Wednesday, when the firm announced 50 per cent higher revenue expectations for 1996.

Furious co-chairman Sir Alastair Morton called for a Stock Exchange inquiry and said reports of pleas for pounds 8bn of support from the French government were "old hat". Both the UK and France squashed speculation of a bail- out, with the 1987 Channel Tunnel Act forbidding state intervention.

Eurotunnel shares ended the week at 82p, valuing it at just pounds 377m, against the 265p long-suffering investors stumped up in an pounds 858m rights issue in May 1994.

Of the UK banks, NatWest, Midland and Barclays have lent the most, with an estimated pounds 650m of exposure between them. Lloyds is also a creditor.

The face value of Eurotunnel loans has plunged from 60 per cent since it froze interest payments on pounds 8bn of junior debt in September, saving some pounds 2m in daily interest charges.

Lloyds kicks off the reporting season in mid-February and, employing the practice on bad debts to countries such as Mexico and Brazil, auditors may push banks to follow distressed market prices if a solution remains out of reach.

"It's crunch time. Last year I thought 40 per cent provisions might be right, but subsequently perhaps that's not prudent enough. Maybe 50 per cent is too low; maybe it should be 60 or 65 per cent," said Tim Clarke, analyst at broker Panmure Gordon.

Last week, Sir Alastair said he hoped for a statement early in February on progress. But this weekend company sources said a formal proposal to shareholders was unlikely before April.

Part of the problem is squabbling among the banks themselves. Some 35 Japanese banks have the largest exposure, around 25 per cent, but - like the French with 20 per cent - have weaker balance sheets than their UK counterparts.

Last week, Baroness Thatcher was dragged into the dispute, with claims that Japanese resistance was part due to a letter from her that was interpreted as government support.

Sir Alastair has publicly ruled out a debt-for-equity swap and is pushing for a cut in loan rates. French co-chairman Patrick Ponsolle, however, has called for conversion or write-offs of up to 50 per cent of loans.

Analysts also believe such an outcome inevitable. Broker UBS thinks a nine-for-one rights issue possible at 40p, raising pounds 3.2bn via the issue of 8 billion new shares. "We're past the point where part measures will suffice - 800 odd million last time was sticking plaster, not major surgery," said UBS analyst Matthew O'Keeffe.

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