Eurotunnel will have to undergo a partial refinancing this autumn and will be forced to convert more than a third of its debt into equity within three years, according to a report.
The gloomy prognosis by debt specialists Klesch & Co was dismissed by Eurotunnel, but the concerns were enough to hit its shares, down 3p at 179p.
Klesch estimates that Eurotunnel will undergo a partial refinancing of about pounds 300m later this year, and by early 1998 will have to swap about pounds 3bn of debt into equity.
Raising new cash from shareholders is out of the question because of the low share price, and the chances of a bond issue succeeding are unlikely, says the report.
Klesch said Eurotunnel's debt was significantly overvalued even at its current trading price of 65 per cent of nominal value. A price war with the ferry companies, and lower passenger numbers and revenue yields meant the company was at risk of being overwhelmed by debt-service costs.
Klesch said Eurostar was running between eight and 10 trains to Paris each way per day, and five to Brussels, compared with a prospectus forecast of half-hourly services. Even the July 1995 figure of 27.5 freight trains per day was well short of the 70 the 1994 rights issue prospectus predicted would be using the system by 1996.
Klesch said in the short term Eurotunnel was basing its hopes on recovering up to pounds 400m in compensation from its Railway Usage Contract dispute with the users of the tunnel, but this had yet to be settled. Only when duty- free sales, worth pounds 250m a year to the ferry companies, were phased out in 1999 would Eurotunnel be rescued from its revenue shortfalls.
Bankers meet Eurotunnel for talks this autumn. One agreed yesterday that some refinancing might be needed this year, but they could not judge the size of the problem yet.
"We simply do not know what the revenue and costs situation will be until we talk. And to take a view on what might happen in 1997-78 is, perhaps, foolish."
A Eurotunnel spokeswoman said: "Klesch is in the business of creating a market in discounted debt. Their reports are designed to encourage that market. We have no comment on this particular report or the conclusions contained therein."
Meanwhile, Eurotunnel is due to release second-quarter turnover figures either today or tomorrow. The numbers will give analysts a first chance to see what the tunnel operator is charging in real prices in the face of strong competition from the ferry companies and its cashflow.
Richard Hannah, analyst at UBS, forecasts second-quarter sales of pounds 65m, against pounds 49.6m for the first quarter.