Eurotunnel to claim pounds 2bn costs

Financial crisis: Confidential bank documents disclose deep concern at repayment prospects
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The Independent Online
PETER RODGERS and DAVID HELLIER

Eurotunnel is to lodge claims that could run as high as pounds 1bn against the British and French governments for actions that have led to considerably higher costs for the company.

It also plans to start new arbitration proceedings against TML, the tunnel's builders, for the costs of defective equipment since the tunnel was handed over. The claim could also be up to pounds 1bn. This emerged yesterday as Eurotunnel angered many of its 225 bankers by unilaterally suspending interest payments of more than pounds 2m a day on pounds 8bn of debt for the next 18 months. The Bank of England was kept fully informed.

Sir Alastair Morton, co-chairman of Eurotunnel, said the British and French governments "haven't delivered some of the substance of their undertakings to private investors".

Although the governments are legally unable to invest in the tunnel, the company's case is that investors have borne higher costs because of government actions and inaction. Complaints include the poor performance of the state-owned railways, the high safety engineering costs which had been imposed on the tunnel by official bodies and delays in improving the UK infrastructure. He also cited what he called the government's "costly administrative approaches" and the pounds 120m-a-year UK "subsidy" to ferry operators through profits on duty-free sales which are denied to travellers going through the tunnel using Eurostar.

Eurotunnel recently lost a court case over the duty-free issue, but won a settlement last year from TML over construction cost overruns. It is expecting to hear soon the results of a pounds 1bn arbitration claim against British and French railways.

Sir Alastair blamed the fin-ancial crisis on the ferry price war and the slower than expected build-up of Eurotunnel's business.

The suspension of interest, which could save up to pounds 1.2bn over 18 months, stoked fears among shareholders that they would be called on to put up new money or face severe dilution of their holdings if the banks swap some of their debt for shares. Eurotunnel shares slumped 14 p to 142p, just over half the price paid in an pounds 856m rights issue last year.

Sir Alastair said shareholders and bankers would have to share the pain but ruled out a call for new cash from shareholders in the near future. He aimed for an eventual refinancing, after the debt rescheduling, through a return to the capital markets.

Some smaller lenders were furious that they had not been informed of the deal before they heard on the radio.

But the four lead banks - NatWest, Midland, Credit Lyonnais and Banque Nationale de Paris - issued a statement saying they continued to be supportive towards Eurotunnel.

The announcement of the debt standstill followed weeks of negotiations and meetings on Monday this week between Sir Alastair and the four agent banks, on Tuesday with 21 leading banks and on Wednesday with 40 senior debt lenders.

The company's decision to stop paying interest was to stop an "infernal spiral of increasing debt", said Patrick Ponsolle, the French co-chairman.

Eurotunnel raised pounds 693m of senior debt last year in its pounds 1.5bn refinancing, and was given permission this spring to draw up to pounds 300m of the sum, of which it has so far borrowed pounds 260m with pounds 40m left to draw.

Mr Ponsolle said Eurotunnel did not plan to ask the banks to release the remaining pounds 393m, but the company is expected to ask for about pounds 60m.

Interest payments are to continue on the senior debt. The interest suspension applies to the junior debt raised before 1994. However, a confidential letter from Eurotunnel's four agent banks, headed by NatWest, to the rest of the 225-strong syndicate appeared to raise doubts about Eurotunnel's ability to continue paying interest on the senior debt.

The letter says the lead banks will have to ask the 65 senior lenders for a waiver to allow Eurotunnel to draw more money. Although the company was expected to be at break even, "it is expected that from time to time during the standstill period Eurotunnel's gross revenues may be insufficient to pay all its obligationst" as well as on loans from the European Investment Bank and the European Coal and Steel Community. The two latter bodies have joined the core group negotiating a debt rescheduling with Eurotunnel.

A letter to the banks from Sir Alastair and Mr Ponsolle says: "Our objective now, in close cooperation with our bankers, is to rearrange the burden of servicing our capital."

Comment, page 27

Chronology of the cash crisis

1987 Banks agree pounds 5bn loans, first shares issued. Tunnelling begins

1989 Shares soar until cost overruns fuel fears of rights issue

1990 European Investment Bank fills immediate shortfall with pounds 300m loan, followed by pounds 1.8bn loan and rights issue

1991 Main tunnels completed but fears grow over delays

1992 Delay in opening confirmed, funding shortfall emerges, fears mount of new rights issue

1994 Full-scale refinancing with pounds 700m loans and pounds 858m rights issue just ahead of start of services through the tunnel

1995 Further delays in build-up of services, confirmation of large revenue shortfall. In May, banks approve release of pounds 300m of loan to tide over to October

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