Lenders reject demand from Eurotunnel for £4bn write-off

Eurotunnel, the debt-laden operator of the Channel Tunnel, threw down the gauntlet to its creditors yesterday by demanding that they write off two-thirds of the £6.3bn they are owed without receiving anything back in return.

Eurotunnel, the debt-laden operator of the Channel Tunnel, threw down the gauntlet to its creditors yesterday by demanding that they write off two-thirds of the £6.3bn they are owed without receiving anything back in return.

The shocked creditors immediately rejected Eurotunnel's proposals as "not acceptable" and urged the Anglo-French group to negotiate on a rescheduling of its debts "in a spirit of economic realism". Eurotunnel's high-risk strategy increases the danger of the creditors declaring the company in default, calling in their loans and taking control of the tunnel.

Eurotunnel appears to be relying on the British and French governments to step in and prevent the creditors exercising their right of substitution.

Admitting that the group would be bankrupt in less than two years without a debt write-off, Jacques Gounon, the chairman, said: "This would put the two governments in the position of choosing whether to support the creditors or 800,000 shareholders. For political reasons, governments would not chose to be in that position."

M. Gounon admitted that Eurotunnel was playing a game of "political bluff" with the creditors but he argued that it had nothing to lose as shareholders would almost certainly be wiped out anyway in any debt-for-equity swap. More than 70 per cent of the company is owned by French investors, mostly small shareholders.

Sources close to the creditor committee, which represents banks and other lenders holding £3bn of Eurotunnel's debts, said the only power the governments had was to decide whether the lenders were "fit and proper persons" to take over the tunnel in the event that they exercised their right of substitution.

A Eurotunnel spokesman insisted that the two governments held the power of veto over whether the banks could take control of the tunnel as they owned the assets. The stand-off sets the scene for some ferocious negotiation. Under the terms of the waiver of Eurotunnel's credit agreement, which lenders gave last month, the company must come up with a restructuring plan no later than 15 July.

M. Gounon, a former executive with the French engineering conglomerate Alstom, said that Eurotunnel's shareholders had already made enough sacrifices through successive rights issues and a £2bn debt-for-equity swap in 1998, which reduced their stake in the tunnel.

Eurotunnel said a report drawn up by the accountants Deloittes had concluded that the tunnel could not support debts of more than €3.3bn (£2.24bn). On the basis of this Eurotunnel was seeking to wipe out about €6bn of its loans. This would enable it to cover its interest payments of £120m a year from operating profits of £150m, leaving it with £30m a year to invest in the tunnel and reward shareholders.

Eurotunnel reduced its underlying losses last year by 14 per cent to £127m despite a 4 per cent decline in revenues. After impairment charges, the loss was £570m compared with a bottom line loss of £1. 334bn in 2003. Eurotunnel made an operating profit of £171m in 2004. But this was dwarfed by an interest charge of £298m.

Eurotunnel is allowed to meet part of its interest bill by issuing IOUs to lenders. But this facility runs out at the end of this year. But in November next year the minimum usage charge paid by Eurostar and freight operators expires, robbing it of £67m in revenues. But the real crunch will come in 2007 when it has to start repaying its actual debt, which would make it bankrupt without a huge debt write-off, M. Gounon said.