Eurotunnel recovery hit by slump in shuttle income

Eurotunnel warned yesterday that it would not make enough money this year to cover interest payments on its £4.8bn debt mountain because of a slump in revenues caused by the economic downturn.

But the Channel Tunnel operator said it would not be in default of any loan agreements, nor would it need to swap more debt for equity because it can issue "stabilisation notes" instead of interest payments to its lenders until the end of 2006.

Revenues for the first half of the year fell 7 per cent to £272m after an 11 per cent fall in income from Eurotunnel's passenger and freight shuttles. Although Eurotunnel carried 4 per cent more cars and 3 per cent more trucks on its shuttle fleet, revenues were lower because of savage price cuts designed to gain market share.

The number of passengers carried through the tunnel by Eurostar on through-rail services between London, Paris and Brussels, fell by 11 per cent to 2.85 million in the six-month period to the end of June. However, Eurotunnel was insulated from the financial effects by a "minimum usage charge" which brought in guaranteed revenues of £115m - slightly up on the £113m received in the first half of 2002.

The minimum usage charge also ends in 2006 and unless Eurotunnel can generate a lot more through passenger and freight traffic, its revenues will drop by around £70m or one-third.

Charles Mackay, Eurotunnel's chairman, said that because of difficult market conditions, it was unlikely that the company would earn enough revenues to cover interest charges from cashflow this year. In the first six months, cashflow was £138m while net interest was £159m.

Despite increasing insurance premiums and higher maintenance costs on its shuttle fleet, Eurotunnel managed to keep operating costs steady at £130m.

Richard Shirrefs, chief executive, said that Eurotunnel would continue with its financial engineering in an effort to pay down debt and cut its interest bill. In the first six months it reduced debt by £90m.

One of the techniques it has used to cut debts is to buy up leasing companies and then offset its own tax losses against profits made from the leasing business. The extra profit this frees up is then used to back debt in the capital markets.

Mr Shirrefs also said that Eurotunnel was in "active discussions" to launch its own through-freight operation starting with a service from Lille to Daventry in Northampton. It is likely to be run in partnership with one of the existing through-freight companies, EWS or the state-owned French railway SNCF.

Eurotunnel is also looking at the possibility of opening a new terminal in Folkestone capable of handling bigger continental-gauge trains.

The huge loan refinancing exercise which took place in 1998 and halved Eurotunnel's debts from a peak of £8.8bn resulted in the banks taking over 45 per cent of Eurotunnel's equity. If Eurotunnel opts to exchange the stabilisation notes it issues into shares then the proportion of the company no longer owned by its original shareholders will rise to 60 cent.