Eurotunnel poised for deal to allow debt rescheduling

The Ailing Channel Tunnel operator, Eurotunnel, is close to reaching a deal with its banks which will allow it to sit down and begin negotiations over the rescheduling of its £6.2bn in debts.

The Ailing Channel Tunnel operator, Eurotunnel, is close to reaching a deal with its banks which will allow it to sit down and begin negotiations over the rescheduling of its £6.2bn in debts.

Sources close to the syndicate of 122 banks said yesterday that the Anglo-French company could soon be in a position to agree a default waiver with its lenders, paving the way for the talks to begin.

The negotiations are likely to include the possibility of some form of debt-for-equity swap to relieve Eurotunnel of some of its huge interest burden. In order to begin negotiations, however, Eurotunnel first needs agreement from its banks to waive the clause in the credit agreement which says that merely seeking talks on its debts constitutes an act of default.

Reports in Paris yesterday said a waiver could be just days away, although sources in London suggested it would take longer than that. "It could be quite soon," said the source close to the creditor banks. "The company now seems to think it has a position which would be acceptable to a majority of creditors."

Eurotunnel needs the support of holders of 75 per cent of its junior and senior debt for a default waiver. The company has £3.2bn of junior debt and £400m of senior debt.

If the banks wanted to, they could enforce the default clause, sack Eurotunnel and bring in a new management to run Channel Tunnel shuttle services. But observers said they did not believe Eurotunnel would approach the banks unless it was certain of getting their support.

Eurotunnel is facing its first financial test at the end of this year when it has to start servicing its debts entirely in cash rather than by issuing "stabilisation notes" - zero coupon bonds which are convertible into shares.

Most analysts think the real financial crunch will come at the end of 2006, when the minimum usage charge paid by Eurostar comes to an end - potentially depriving Eurotunnel of up to £40m-£70m in revenue, the stabilisation notes start to charge interest and repayments of the junior debt begin.

Eurotunnel has only been able to pay its interest charges from its free cash once in its history. In the first half of last year, interest charges were more than double its £70m operating profit.

The company is now implementing a new commercial strategy designed to adjust shuttle capacity more closely to demand and increase yields. But it is facing resistance from freight companies, who are unhappy at being forced to guarantee at the start of the year how much traffic they will put through the tunnel if they want to qualify for cheap rates.