Eurotunnel interest may be deferred: Bankers consider contingency plans in case refinancing fails

EUROTUNNEL's bankers have been considering contingency plans, including a deferral of interest payments, in case the pounds 1.6bn capital-raising now under way ends in failure or is seriously delayed.

There were growing signs last night that most banks would join in a pounds 700m loan after frantic efforts this week to persuade unwilling Japanese lenders to come in.

The campaign has already succeeded in obtaining the 90 per cent acceptances from banks required to approve the refinancing.

But the game is not yet over because an even bigger hurdle must be jumped in the next 10 days in the shape of a rights issue that will demand up to pounds 900m from shareholders, pounds 300m more than the company admitted in public six weeks ago.

The precise size depends on whether there is any shortfall in the bank loans, and on a decision shortly by the Eurotunnel board whether to give itself a financial cushion over and above its projection of cash needs.

With pounds 6.7bn already lent to the project by more than 200 banks, senior bankers emphasised their commitment and their determination not to let it slide into receivership at a stage when capital costs have been paid and construction finished.

The money required is to run the operations for the first few years after existing funds run out next month.

But bankers said if for any reason the capital-raising exercise did not succeed in time the lenders would have to re-examine the structure of Eurotunnel's finances and this would almost certainly lead to deferrals of interest payments while a solution was negotiated.

Eurotunnel would once again be in breach of its banking covenants, but precipitate action is ruled out. A debt-for-equity swap that would dilute shareholders is 'a long way from current thinking'.

Bankers said they were convinced that the project was going to succeed in the medium to long term, so if there were bigger problems than expected it was a question of finding a different way of managing the cash flow.

Last night, sources close to the negotiations with the banks insisted that they were moving towards a successful outcome and that the position was 'looking a lot brighter than 24 or 48 hours ago'. Eurotunnel was said to be getting very close to the pounds 700m it needs, after sticking at pounds 500m earlier this week.

Japanese sources said Bank of Tokyo had joined Industrial Bank of Japan in agreeing to the deal and other big names such as Sanwa are also signing up. The log-jam with the Japanese banks began to break earlier this week. They account for 23 per cent of existing loans.

Eurotunnel needs to raise a minimum of pounds 1.5bn after expenses, assuming a pounds 500m safety margin over the base forecast of cash needs. If this margin is raised to a more comfortable pounds 600m, which the board is considering, fund- raising of pounds 1.6bn is required, and there were indications that this could rise as high as pounds 1.65bn.

On the company's current projections for the equity-raising exercise the top amount shareholders are likely to have to pay is pounds 900m, though sources involved said no decisions had been taken.

However, as soon as the final tally from the banks is known in the next few days the rights issue preparations will go into overdrive and the deal will be announced within a week.

The Eurotunnel board has shareholder approval to issue up to 342 million new shares. The next big obstacle will be getting this underwritten without too heavy a discount to last night's closing price of 375p, down 30p on the day as it became increasingly likely the issue would swell to pounds 900m.