Eurotunnel in breach of covenants on pounds 9bn loans: Banks to be asked for waivers following delay in start-up of services

EUROTUNNEL is expected to confirm on Monday that it will have to negotiate with its bankers next spring for waivers on the covenants on its pounds 9bn of loans. The company is now certain to be in breach of them.

But Eurotunnel will reject suggestions that it will need another rights issue or general refinancing as a result.

Sir Alastair Morton, Eurotunnel's co-chairman, is to present the company's half- year results against a background of concern in the City about the effects on revenues of the late start-up of services.

The revenue problem emerged in the summer when the company confirmed that the July and August start-up dates for the shuttle and rail passenger services would not be met. This shot a big hole in the revenue forecasts contained in the prospectus for the company's pounds 858m rights issue in May - part of a pounds 1.6bn refinancing.

The prospectus had forecast losses of pounds 382m in 1994 and pounds 473m in 1995 and a 1996 profit of pounds 289m. But next week's interims cover the period before the missed start-up dates.

Eurotunnel is likely to describe the breaches of the covenants as largely technical, against a background of a disagreement with bankers about how much spare cash was built into the refinancing plan.

Eurotunnel's prospectus indicated that it was raising pounds 469m more than it needed to see the project through to positive cash flow. That assumed the exercise of pounds 150m of share warrants next October, providing new equity, and the successful completion of a leasing finance deal next summer for buying rolling stock.

The company argues that it has used up only about pounds 100m of its spare cash because of the shortfalls. But the banks refused to include the warrants and the leasing deal in their calculations and they estimated the funding margin at a tiny pounds 34m in May - a figure that was also in the prospectus. The breach of the covenants is because the revenue shortfalls of pounds 100m already exceed this safety margin.

Eurotunnel's problem with the warrants is that they are not underwritten and are exercisable at 300p, well above yesterday's closing share price of 245p. The shares fell 18p yesterday on financing worries.

The leasing deal counts as new debt that will have to be approved by the banks. So with the covenants breached, Eurotunnel will be seeking waivers to allow the leasing deal to go ahead.

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