Jeremy Warner's Outlook: Why crying wolf isn't going to help resolve Eurotunnel's refinancing negotiations

Another knock for Sir Philip Green; More an evolution than a Big Bang
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The Independent Online

Right, that's it. Negotiations over. Game over. Accept or the tunnel gets it. The trouble with this kind of brinkmanship is that it can only be used once or no one will take it seriously. With Jacques Gounon, chief executive of Eurotunnel, it's been used once too often before to have any remaining credibility. He's always saying that he'll put the company into liquidation unless debtholders agree his refinancing terms. M. Gounon can insist all he likes that this time it's for real, but nobody will believe him.

As it is, the Channel Tunnel refinancing announced yesterday is almost exactly the same as the one proposed last May. Except in one particular. In order to give a little bit more to the bondholders, M. Gounon has taken something away from the senior debt holders. Equity holders are meanwhile left unscathed. To the fury of tier-three debt holders, share owners will still end up with 13 per cent of the company under the debt-for-equity swap now proposed.

The upshot is that in attempting to placate bondholders, M. Gounon has only succeeded in alienating his senior debtholders, most of whom had signed up to the original May proposals. The only people whose position is left untouched are Eurotunnel's one-million strong army of French retail investors.

In any other refinancing where lenders were being asked to write off half their debts, equity holders wouldn't get anything at all. Yet French insolvency procedures oblige the company to treat all stakeholders equally, regardless of their position in the pecking order of creditors. Decency alone, M. Gounon would say, obliges him to look after their interests.

Is the threat of liquidation as serious as M. Gounon pretends? Well perhaps, but the whole thing is shot through with legal complexities. Eurotunnel insists that, under French law, stakeholders must either accept the plan as presented or the courts will put the company into liquidation. In such circumstances, the com-pany might not be worth anything at all since, under the terms of the original concession, the Channel Tunnel assets would revert to the British and French governments.

Whether this would in fact occur is open to legal interpretation. Senior debt holders in any case believe that, in the event of default, they are entitled to "substitution", allowing them to take control of the company so that it can be run in their own interests until their debts are paid off. Despite his threats, the cards still seem heavily stacked against M. Gounon and his one-man quest to salvage something for the shareholders.

Exciting stuff. Yet despite the apparent drama, its long-term significance is in all probability precisely zero. The Channel Tunnel cost far more to build than it was ever likely to generate in revenues. As a result, it has staggered from one financial crisis to the next from the moment it opened.

The original debt holders have long since written off their investment and departed the scene, leaving title to the company in the hands of hedge funds, vulture capitalists and other unsavoury inhabitants of the financial markets. They'll have paid only a tiny fraction of the debt's £6.2bn face value for their interest. How much of this money they eventually get back is frankly of no relevance to anyone but themselves. Whatever happens, I'm sure they'll do very nicely out of it.

In the meantime, the tunnel will keep operating. No one has any interest in seeing it closed. Even if the company is put into liquidation, closure is highly unlikely. The protagonists in this tragi-comedy are like Macbeth's player, who "struts and frets his hour upon the stage, and then is heard no more... a tale told by an idiot, full of sound and fury, signifying nothing".

Another knock for Sir Philip Green

Much schadenfreude among Sir Philip Green's high street rivals over the setback in results at Arcadia, owner of the Topshop fashion chain. Profits are down, like- for-like sales are down, the operating margin is down, and Sir Philip is even having to forgo the usual £1bn-plus dividend cheque. Times must indeed be tough.

Yesterday's results top off a run of bad news for Sir Philip, which in short order has seen a veritable collapse in profits at Bhs and the sudden resignation of Jane Shepherdson, the brand director credited with transforming Topshop from downmarket also-ran into height-of-fashion chic. Sir Philip's coup in hiring Kate Moss somehow got lost in all the downbeat news flow. If the appointment was indeed the cause of Ms Shepherdson's departure - publicly denied by all concerned - then it looks a poor trade-off.

Is the newly knighted Sir Philip losing his midas touch? All things are relative and though he certainly seems to be going through a bit of a rough patch, he's still a 100 per cent owner of some highly cash generative businesses and he's got at least a couple of billion stashed away under a rock in Monaco to boot. That hardly counts as being down on your uppers.

Even so, he's plainly feeling the pinch. It is impossible not to think that this might have something to do with the way he's fleeced his companies for cash over the years he's owned them. His success may have more to do with financial wizardry than retail genius. You cannot take a couple of billion out of a company, loading it up with debt in the process, and expect it to have no effect whatsoever. Looking into the detail of Arcadia's results, Topshop, Topman and Wallis performed reasonably well, but elsewhere things were little short of disastrous.

Sir Philip insists that he's doing no worse than anyone else in a tough high street trading environment. Judged against Debenhams, which recently admitted that like-for-like sales since the beginning of September were off more than 4 per cent, he may be right, yet it is clear that others - notably Marks & Spencer and Next - are doing much better.

It can surely be no coincidence that Debenhams too was repeatedly recapitalised under its previous private-equity owners. When companies are loaded with debt, they tend to be run for cash. In order to satisfy the demands of their bankers, they skimp on investment in the future. You can have all the retail flair in the world, but ultimately high leverage is bound to undermine top-line growth. As it happens, Arcadia nearly doubled its capital spending last year, but, at just £123m, it's no match for the money being poured into refurbishment and expansion at M & S and Next.

When Sir Philip failed in his bid to buy M & S a couple of years back, he vowed to make the company's shareholders pay for their obstinacy by killing them on the high street. A huge programme of investment was promised so as to trounce the competition. If Sir Philip couldn't have M & S, he'd put them out of business instead. There's not much evidence of it in these figures.

More an evolution than a Big Bang

It's finally arrived - the 20th anniversary of Big Bang. Yet was it as big an event for the City as we fondly recall? A brief flick through the cuts from that period reveals that we think a great more highly of it today than we did back then. The day itself was only the culmination of a process of deregulation that had actually begun in the dying days of the previous Labour administration before Mrs Thatcher, who counts Big Bang as one of her greatest triumphs, came to power.

Labour's attack on the stock exchange under new competition legislation which outlawed cartels was in truth more class warfare than liberalisation. It was only under the Tories that deregulation of the City came to be seen as in itself an economically desirable outcome.

Yet by the time it actually happened, most of the big foreign players who were to transform the City landscape had already arrived. Many of them lost their shirts in the subsequent shakeout. Big Bang only directly affected equity and gilts markets - a relatively small part of the City.

An earlier reform - the sweeping away of remaining foreign exchange controls - was arguably far more important. Even so, the technology and expertise that new stock exchange entrants brought with them, not to mention the Wall Street salary structures, would in time have a truly transformational effect. Big Bang was part of an evolution, yet a vital part of it, none the less.

j.warner@independent.co.uk

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