Eurotunnel rescue to give banks control

Eurotunnel is on the verge of a deal with its bankers that will cut its pounds 9bn debt mountain in half but leave its 760,000 shareholders virtually disenfranchised.

Under the terms of the deal, which has been brokered by court-appointed arbitrators Robert Badinter and Lord Wakeham, the consortium of 225 banks holding Eurotunnel debt will immediately forgo around pounds 1.4bn in interest payments and convert pounds 3bn of their debt into shares, in return for 49 per cent of the company.

The deal, expected to be announced in principle early next month, is likely to confirm shareholders' fears that the price of rescue will be giving the banks majority control. For the package is thought to include convertible loan notes which, when exercised, would see the banks control up to 80 per cent of the shares. The banks will also receive a slice of Eurotunnel's revenue if the company beats certain sales targets long before its first official dividend payment, currently scheduled for 2004.

If the deal comes off, it will be a bitter-sweet swan song for Sir Alistair Morton, who is stepping down as co-chairman of the company in October to be replaced by Robert Malpas. He has said he will not leave until an agreement has been reached with the banks, but has thus far resisted proposals to give them majority control.

Tomorrow, he and co-chairman Patrick Ponsolle will report that Eurotunnel reduced its losses for first six months of 1996 to around pounds 350m, down from pounds 465m for the same period last year. Much of the loss is attributed to the cost of servicing Eurotunnel's pounds 9bn debt, for which the company is making provision even though it is not currently making the interest payments.

They are also expected to announce that for the first time the company recorded a positive operating cash flow in the second quarter, vindicating the marketing strategy of cutting fares and pricing duty-free goods below those of the ferry companies. The result was an increase in its share of the cross-channel market from 40 per cent to 44 per cent. However they are unlikely to reveal full details of the restructuring as negotiations are still continuing, particularly over the exercise price of the convertible loan notes.

Eurotunnel has brought its interim results announcement forward by a month, promptingspeculation of an attempt to "soften up" militant shareholder groups with some good news before they see their holdings swamped by the debt-for equity swap in October.

Leading analysts agree that things might be finally looking up for the market's perennial basket case. "The operational picture is now looking remarkably rosy," said Jeff Summers, Eurotunnel analyst at Klesch & Co. "But only the banks are likely to benefit from the restructuring."

Richard Hannah, the analyst at UBS Securities who has been urging investors to bail out of Eurotunnel since the early 1990s, was also cautiously optimistic. "If the company can switch pounds 4bn-pounds 5bn of its debt into equity, it has a hope of making a long-term return," he said.

Both said any deal hammered out between the company and the lead banks will still be subject to approval by two thirds of Eurotunnel shareholders, and the 225 banks. The process may run beyond next March, when the company is scheduled to resume its interest payments.

This weekend the French shareholder activist groups reiterated their threat to tie up any restructuring in the French courts, where they will argue that the banks consortium engaged in "abusive" lending to Eurotunnel, which would be illegal under French company law.

However some leading shareholder activists now privately admit that such a tactic would merely delay the inevitable dilution of their holdings, and might force the company into receivership. "We still intend to fight for the best possible terms for the shareholders," said one. "But the debt situation must be resolved soon."