Outlook: Eurotunnel develops taste for financial engineering

EUROTUNNEL RIGHTS issues are generally greeted with the same enthusiasm reserved for French blockades of the Channel ports. The last one in 1994 had the dubious distinction of being so badly received that the market price of Eurotunnel shares fell virtually to the level of the deeply discounted rights. But that was when Eurotunnel was a basket case and in desperate need of more cash just to complete the construction phase.

Five years on, Eurotunnel's rehabilitation is hardly complete, as underlying losses of pounds 215m remind everyone, but at least there is light at the end of the tunnel.

Eurotunnel prospectuses have a proud tradition as works of fiction, so we shouldn't perhaps expect too much from this latest attempt to tap the market. Even so, this seems a reasonably promising initiative. Shareholders are being invited to stump up funds so that the company can buy back a chunk of its debt at half face value. The net effect will be to reduce interest payments and thereby bring closer the day when the Channel Tunnel breaks into profit.

It may seem like a zero sum game to cough up for more shares now with a promise that it will bring the first dividend payment nearer. But if only Eurotunnel had been as skilled at civil engineering as it is becoming with financial engineering, then that might not have been the sort of choice facing shareholders.

Eurotunnel's grand debt restructuring in 1997 halved its pounds 8.5bn debt mountain overnight and introduced us to some exotic new forms of paper that even the investment bankers struggled to understand. But the one crucial thing it achieved was to free the company from the yoke of compound interest, allowing it to chip away at its remaining debts without having to worry about interest being added to the interest.

That is not to say Eurotunnel's troubles are behind it. The thought of Eurotunnel submitting proposals for a second link will produce wry smiles among those bankers who sank billions into the first one, and are still waiting for it to break eve