Eurotunnel would need between pounds 1bn and pounds 2bn to cover its future cash needs if it were to be refinanced immediately with new equity, according to the company's own estimates.
This is a measure of the enormous shortfall which has emerged since the company raised pounds 1.5bn from banks and shareholders in May 1994, and indicates the scale of the sacrifice both could be called upon to make.
Sir Alastair Morton, co-chairman, said yesterday that the decision to suspend payments on pounds 8bn of debt with an 18-month standstill on bank interest was at the company's initiative and was not forced on it by its banks. On past form, the 225 banks concerned could have to make huge bad-debt provisions that could easily reach pounds 2bn. The unpaid interest will be added to the loans in the hope of eventual repayment.
Eurotunnel has been paying its interest by borrowing new money from the banks, a standard tactic in the start-up phase of a large project of this kind, before revenue builds up to a level which enables it to cover the interest bill.
However, because of lower- than-expected revenue, a crunch point was due to be reached before the end of Oct-ober, when Eurotunnel was likely to run out of money to pay the interest. To stay afloat over the next six months, it would have needed a lot more money from the banks.
During crisis talks, the most widely favoured alternative among the banks to a formal 18- month standstill was simply to allow the company an open- ended moratorium on interest payments, which might last considerably longer.
Eurotunnel would carry on as normally as possible while the banks would put their faith in an easing of the ferry price war or an increase in tunnel traffic to solve the problem.
But the option was rejected by Eurotunnel in favour of a full-blooded standstill during which it could negotiate a debt restructuring package that it hoped would, at last, put the project permanently on a sound financial footing, rather than leave events to drift.
Sir Alastair described the option of letting the project continue with open-ended financing as the "Mexican solution", in which unpaid interest would accumulate "like rolling a snowball down hill". He added: "We said, what is the point? The way the numbers are developing we are going to have to call a stop unless you [the banks] promise us unlimited funds."
Another plan mooted was a swap of bank debt for equity in the project, reducing the stake of existing shareholders. But this was quickly ruled out by the banks because nobody was able to agree exactly how much help Eurotunnel would need. There was also the prospect of a raft of lawsuits from angry shareholders.
It had already become crystal clear that there was no prospect of raising any money for Eurotunnel from the international capital markets, after the failure to keep so many past promises.
Under the banking agreements, Eurotunnel's lead banks have six months to work out a proposal to put to the company and the 225-strong lending syndicate, though there would by then be a further year of the standstill to run. It could be extended further than 18 months by a 65 per cent majority vote of the banks.
A more fundamental problem than Eurotunnel's inability to pay interest this autumn is that the date at which the company was originally scheduled to begin repaying its pounds 8bn of debt out of its revenue was - according to last year's prospectus - November 1996. Under certain conditions, this could be delayed to the year 2000.
There is now no prospect of meeting even this second date for the start of repayments. The build-up of traffic and new services through the tunnel have been delayed, revenues per passenger have been slashed by a price war with the ferries, and the frequency of the Eurostar passenger-rail service through the tunnel has been lower than projected.
A forecast of six million passengers in 1995 has been reduced to four million. Freight traffic has also been lower than forecast. There have been serious reliability problems, and interest rates have been higher than expected.
Sir Alastair conceded that Eurotunnel's assertion in the prospectus that the ferry companies would merge and cut capacity was wrong, because they have done the opposite. "They have gone to war with us, fighting for the right to oppose us, like a heavyweight qualifier match," he said. The yield per passenger has fallen by 25 to 30 per cent in a year.
Eurotunnel has been covering its operating costs out of revenues since the spring, and during the summer was also able to pay from its revenue for the relatively small amount of capital spending remaining after completion of the main project. However, it is unlikely to be able to meet all the capital spending bills due during the autumn.
Sir Alastair said that all the banks would receive during the standstill would be any excess revenue above Eurotunnel's operating needs. He rejected any suggestion that the tunnel was bust, and said it was business as usual as far as the operations were concerned. The tunnel had been paid for and was running, and the banks were not going to seize the assets and shut them down because a hole in the ground was no use to anyone.
Neither did the banks want to step in and run the tunnel themselves "though they may criticise the way we manage it".
Putting Eurotunnel into administration in France and England was always a possibility, Sir Alastair conceded, though he believed it was a remote one, and had been examined by the banks along with all the other options.
But he believed the banks would be particularly reluctant to ask for administration. Where the French assets are concerned, French bankruptcy law is less sympathetic to bank creditors and more protective of employees and shareholders than English law.
Eurotunnel's agreement with its banks sets out detailed terms for the standstill agreement, which Sir Alastair described as "the first thing we [and the banks] agreed on". As negotiations over a new plan continue, the unpaid interest and penalty payments will be added to the debt. The likeliest outcome is that the banks will be asked to convert their backlog of interest and some of their debt into longer-term securities, perhaps with the start of interest payments on the securities delayed.
They are certain to be asked to delay the dates for repaying the capital, in a comprehensive re-scheduling. But the banks are bound to demand big sacrifices from shareholders in return, though a rights issue paid for by shareholders is not currently on the agenda.
Sir Alastair believes he can avoid a capital issue by the company for at least two years. One solution that would raise long-term funds, while delaying dil-ution of existing shareholders, would be to offer the banks bonds convertible to equity.
Another would be to ask the banks to swap their loans for mezzanine debt, a security which has some of the characteristics of equity. It brings higher returns than ordinary loans, but only if the project becomes successful.
However, there is a widespread view in the City that there is no escape for shareholders, who will eventually have to cough up new money or face a substantial dilution of their stake in the company.Reuse content