The Channel Tunnel operator Eurotunnel issued a plea yesterday for government help after plunging to a £1.3bn loss - the worst in its 17-year history.
The Anglo-French company said that the cross-Channel rail market was in a "state of failure'' and called on the government-backed rail operators of Britain and France for aid in bringing down its £6.4bn debt mountain.
Eurotunnel, which has been making heavy losses since services began in 1994, said it intended to slash the amount it charges Eurostar and rail freight operators for using the tunnel in an attempt to generate more traffic. This could result in big reductions in fares on train services from London to Paris and Brussels. In return Eurotunnel said it would require a "significant reduction'' in its debt levels and interest payments to reflect the fall in revenues from the railways.
The tunnel operator is understood to have proposed two main ways of cutting its debt burden in preliminary discussions with the British and French governments.
One would be for Eurostar; London and Continental Railways, the company building the high-speed Channel Tunnel Rail Link; and the SNCF, the French railway company, to take a major stake in Eurotunnel. The money raised by issuing new shares would then be used to pay down Eurotunnel's borrowing. The second would be for Eurotunnel to issue bonds guaranteed against future revenues - or securitisation.
The two governments could agree to underwrite the bond much in the same way that the UK government has guaranteed bonds issued to finance the £5bn Channel Tunnel Rail Link.
Eurotunnel may also ask its creditors to take some of the pain by altering the terms of the debt and by extending its length.
A spokesman for the Department of Transport said the Government welcomed any proposals that would put Eurotunnel on a sounder footing. But he said: "The Government has made it clear it will not put any public money into Eurotunnel. Indeed, it is prohibited by international treaty and legislation.''
The Government has retained Patrick Drayton of the investment bank Citigroup to provide financial advice on the proposed restructuring of Eurotunnel. The company is being advised by Dresdner Kleinwort Wasserstein, Merrill Lynch and Société Générale.
Richard Shirrefs, Eurotunnel's chief executive, said it hoped to reach an agreement, in principle, on a new financial structure this year and implement it in 2005. He said that despite £25bn having been sunk into the tunnel and high-speed rail links the market was not working properly. "It is overcapitalised, under-utilised and hugely fragmented. The industry model is in a state of failure,'' he said. He added that if the scale of the debt burden and the low numbers of people using the tunnel had been known it would not have been built.
This would be the second major refinancing of Eurotunnel since it began service and the fourth since construction of the tunnel started in 1986. Eurotunnel's passenger and freight shuttles between Folkestone and Calais are using 80 per cent of the capacity available to them. Eurostar is only using about half the capacity available.
Eurotunnel made a net loss after interest of £34m last year but the bottom-line loss after taking a £1.3bn write down in the value of the tunnel was £1.334bn. Interest charges rose to £318m. The company is able to meet its interest bill by issuing "stabilisation'' notes in place of cash. These notes convert to shares in 2006 at which point the proportion of the company owned by its original shareholders will fall to 35 per cent.
At the annual meeting next month in Paris, investors representing Eurotunnel's 1 million small shareholders will call for the removal of the board and for the governments to bail out the company.