View from City Road: Keeping up with Eurotunnel fantasy

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The Independent Online
Prospectuses for venture capital start-ups tend to be mostly pure fantasy. Eurotunnel is no exception. The only difference is that Eurotunnel has issued so many fantasy prospectuses that it is hard to keep count.

The last of these was for May's pounds 858m rights issue. The revenue forecasts for 1994 and 1995 contained in the document always had to be taken with a large pinch of salt but when Eurotunnel missed its projected July and August start-up dates for shuttle and rail services, they became virtually meaningless. That in turn meant the forecast 1994 loss of pounds 382m would be exceeded by a significant margin. Economic conditions are also proving less favourable than Eurotunnel's prospectus assumptions (optimistic as ever) so the revenue shortfall may well persist throughout next year, for which turnover of pounds 525m was being forecast.

As Eurotunnel critics like Richard Hannah of UBS have been claiming all summer, it is now abundantly clear that the company is heading for a new breach of banking covenants. Coming just six months after the rescue rights issue, this must be something of a first, even for a company as accident- prone as Eurotunnel.

To be fair to the rights issue documents, they did contain the information that explains why. The prospectus claimed the refinancing would give Eurotunnel pounds 459m more than it needed to cover its cash needs but admitted that the banks used different criteria which gave a much smaller figure of pounds 34m.

Given the delay in building up revenue, that pounds 34m headroom has vanished, which means a waiver of the covenants is likely to be needed as early as next spring. Here we go again, you might say, back into that familiar Eurotunnel crisis.

Heads may be knocked together, but it would be surprising if the real crunch arrives quite so soon. It is unlikely that the waiver request will lead immediately to a full blooded refinancing of the sort we saw in May, where shareholders and lenders battled over who would bear the pain. Banks seem inclined to waive the covenants and let Eurotunnel get on with it.

Lenders are focusing on what might be happening further down the line - on the income of the 1995 holiday season and more importantly on the trading results for 1996 as a whole, the make-or-break year that indicates one way or the other if the project is a disaster or a success.

By 1996, it will not be a question of fantasy numbers but cash revenues in the bank. If too low, past Eurotunnel cliffhangers will look tame by comparison. In the meantime, there is little point in getting over-excited about yet another lot of broken covenants.