Losses threaten Tunnel rescue

Banks may reject a restructuring plan as Eurotunnel fails to meet revenue forecasts. Peter Robison reports
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Just months after Eurotunnel executed one escape by convincing angry shareholders to accept an pounds 8.5bn debt refinancing, it now faces a tougher battle with its banks.

The Channel Tunnel operator is set to report another big loss tomorrow, estimated at about pounds 300m, after a disappointing summer season. The tunnel took just 40 per cent of the market for carrying cars across the Channel in August, compared with a forecast of 49 per cent for 1997. It carried 6.5 per cent fewer vehicles last month than it did in August 1996, the third straight month traffic has declined year-on-year.

At least some of the 174 debt holders may be worried enough to reject the plan in a vote likely to take place next month, which has raised fears about whether the company will have to declare bankruptcy.

"The figures tell you something is wrong," said Jeff Summers, head of research at Klesch, a London debt-trading firm. "There must be a question mark as to whether all the holders of the bank debt will be eager to vote through the restructuring."

Richard Hannah, an analyst at UBS, predicted that Eurotunnel will report a first-half loss of about pounds 300m. While the loss would be down about 19 per cent from the pounds 372m loss in the same period of 1996, it does not begin to reflect the gains in traffic and revenue that Eurotunnel had promised shareholders.

At its present pace, Eurotunnel will fall short of its forecast for car traffic this year by about 14 per cent. If it were a different kind of company, the banks would already have foreclosed. It had revenue of pounds 483m last year and would have paid interest of pounds 620m if it had not stopped the payments in September 1995 as it sought the refinancing talks.

Agreed in outline with its top banks a year later, the debt plan could stabilise the situation by slashing annual interest costs by 40 per cent as the banks swap some of the debt for equity and securities that pay lower long-term interest.

The plan still requires unanimous approval from all of Eurotunnel's creditor banks in the vote expected to take place in October, but none of the holders have said yet how they will vote. They range from large banks such as National Westminster to US investment funds like Oak Hill Securities Fund LP.

A spokesman for Eurotunnel said its executives would speak in more detail about their canvassing of the banks after the results are released on Monday.

Mr Summers said he feared that at least one of the US funds, which bought Eurotunnel's debt at less than face value from big banks seeking to cut their losses, may take a hard line if business does not improve.

"These are American high-yield investment funds," he said. "They are not in the practice of giving away value."

He said one avenue they could pursue to secure more of Eurotunnel's revenue than they would receive under the debt plan would be to seek their right of substitution to all of Eurotunnel's cash flow. The right was granted in return for taking on the risk of lending to Eurotunnel, but it can only come with the consent of the French and UK governments.

Mr Summers maintained that, from a strictly legal sense, the governments have already given their consent. In a joint statement in July granting Eurotunnel an extension of its operating lease to at least 2086 from 2052, they said they would have no choice but to grant substitution if the plan were rejected.

While the statement was clearly referring to shareholders, who were poised to vote on the plan within a week, it did not say so. Mr Summers argued that a bank could point to the statement if it decided to push for substitution.

Even so, a rejection would be gutsy. It would anger shareholders and the UK and French governments, which have so far avoided the nightmare scenario of bankruptcy and a cross-Channel jurisdictional battle over the tunnel's assets.

Even the most aggressive bank may not want to court that kind of controversy on the basis of just a few months of numbers. "It's a difficult game," said Mr Hannah.