Banks get half of Tunnel in pounds 4.7bn debt swap

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The Independent Online
Eurotunnel is to swap just over half its pounds 8.7bn debt mountain for shares and other paper in a deal which will give its banks immediate ownership of just under half the Channel Tunnel and put its finances on an even keel for the first time in nearly a decade.

The complex deal, thrashed out by Eurotunnel and a key steering group of six lenders, will see pounds 4.7bn of debt exchanged for equity and other financial instruments and the banks take a 45.5 per cent stake in the business.

Depending on Eurotunnel's performance over the next seven years, the banks could increase their stake to 60 per cent although the company's 750,000 shareholders will have the option to subscribe for enough shares to retain control.

The announcement of the debt-restructuring package paves the way for Eurotunnel shares, suspended a week ago at 115p, to resume trading this morning. Brokers were last night predicting that the shares would rise initially to nearer 130p - the price at which the first tranche of debt will be swapped.

Provided the deal is approved by Eurotunnel's shareholders and ratified by the 225 members of the banking syndicate, the company will see its annual interest payments cut from pounds 650m to pounds 400m a year and its average interest charge fall to 5.2 per cent.

However, the company will not have enough spare cash to pay even this lower interest charge until sometime in the next century so it is effectively taking an interest holiday on a portion of the debt until 2006.

Sir Alastair Morton, the outgoing co-chairman of Eurotunnel, described the accord as "fair and robust" and said he was confident that shareholders and banks alike would accept the deal.

"They have from now until next spring to sit down and judge this compromise. I hope they will be convinced, I think they will," he said.

Referring to the possibility that smaller banks in the syndicate will hold out for a better deal, Sir Alastair added: "Nobody wants a collapse and nobody is looking for a Doomsday scenario. If that happens because of a few blackmailing banks, the big banks have developed a way of sorting it out."

As part of the restructuring package Eurotunnel will also approach the British and French governments to seek an extension of its concession to somewhere between 65 and 99 years. It is currently due to run out in 2052. Sir Alastair stressed, however, that the deal was not contingent on the concession being extended.

Under the terms of the restructuring announced yesterday Eurotunnel will swop pounds 1bn of debt for equity straight away and convert another pounds 1bn into equity notes which it can either redeem partially itself in 2003 or exchange for shares, in which case existing shareholders would see their holdings diluted to just under 40 per cent of the equity.

A further pounds 1.5bn of debt will be exchanged for bonds paying a 6.25 per cent coupon until 2003 and the remaining pounds 1.2bn of debt will be swapped for loan notes which will initially pay fixed interest of 1 per cent and are redeemable by 2040.

The key component of the deal will be Eurotunnel's ability to pay some of the interest it owes in the form of stabilisation notes which themselves will not bear any interest until 2006. Eurotunnel has the authority to issue up to pounds 1.85bn worth of these notes.

In this way Eurotunnel effectively avoids paying compound interest on its debts for the next decade, by which time the company expects it will comfortably be able to meet its debt service obligations and more. "It is the compound interest that kills you and this deal puts a cap on that," Sir Alastair said.

The conversion price for the first pounds 1bn of debt and the stabilisation notes will be 130p. The equity notes will be converted at a price of 150p a share. Alternatively, Eurotunnel can redeem a portion of them through the proceeds of a free warrant issue giving existing shareholders the right to subscribe for new shares at 150p.

Of Eurotunnel's 750,000 shareholders, 81 per cent are French while 68 per cent of its equity is held by individuals rather than institutions. Two thirds of French shareholders need to vote in favour of the deal at an extraordinary meeting attended by those holding at least 25 per cent of the equity.

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