A case of diminishing solutions

Eurotunnel: Banks weigh the options, but a government bail-out is unlikely

As Eurotunnel's financial problems mount, so the number of possible solutions diminish. The company and its 225 bankers have about as much chance of settling the crisis amicably as they have of getting a windfall levy from the ferry operators.

Although enough revenues are now coming in to cover operating costs, Eurotunnel's earnings are woefully short of forecasts. Hence this month's suspension of pounds 700m-a-year in interest payments on pounds 8bn of senior debt.

The company desperately needs to find other sources of cash, and at times it has seemed that Alastair Morton, the co-chairman, was lashing out in all directions to get it.

But attacks on TML, the contractors that built the tunnel, or appeals to the UK and French governments, are a smokescreen that do nothing to address the central problem: Eurotunnel is technically bust.

A pounds 1bn claim against TML is unlikely to realise anything like that figure (if it succeeds at all). While a pounds 2.5bn claim against the national rail operators in the UK, France and Belgium will be bogged down in arbitration for some time to come.

Help from the governments over the ferry operators' right to sell duty free goods, or over France's Sunday night road restrictions which act against lorries coming off Le Shuttle, would be useful.

But such issues are unlikely to loom large in the marathon round of restructuring talks about to begin between Eurotunnel and its banks. There is no easy way out. But what are the possible solutions?

Restructuring will require approval from 85 per cent of Eurotunnel's banks and the chances of this happening were hardly helped by the decision of the European Investment Bank, whose president is Sir Brian Unwin, to call in its pounds 750m worth of guaranteed loans. It has been suggested that some banks may provoke government intervention by deliberately failing to reach agreement by the required majority.

However, the government deficits that precluded state funding at the start of the project still apply. In reality there is little be gained from a government bail out. The banks would not only lose all control over the situation, they would be made to pay dearly in cash and credibility. Besides a few errant banks could be browbeaten into submission.

Putting Eurotunnel into administration is also virtually unworkable. The two countries' legal systems put different emphasis on protecting the interests of the company, shareholders, banks and staff.

An alternative might be for the banks to take complete control, but bankers can hardly be expected to squeeze more revenues from the project than the current management.

Indeed, Eurotunnel's management is not the problem. Sir Alastair Morton is much-praised for the way he has driven the project to completion. Which is why recent speculation that the banks were seeking his removal as part of the restructuring is wide of the mark.

A debt for equity swap would wipe out the value of the shares held by Eurotunnel's long-suffering 630,000 equity holders, most of whom are in France. Gary Klesch, of debt traders Klesch & Co, has warned that Eurotunnel would have to undergo a partial refinancing of about pounds 350m this autumn, and a total pounds 3bn debt for equity swap by early 1998.

Debt specialists have their own agenda, but the scenario was not necessarily discounted by other analysts. However, Sir Alastair, the shareholders' representative, has stated firmly that he is against dilution of the equity holders' interests.

Richard Hannah, of brokers UBS, has proposed that the company, which launched the largest share issue in 1984, launches another one to raise around pounds 3bn of new equity. Mr Hannah says the issue could be underwritten by the banks. However, since the current capitalisation of the company is only around pounds 450m, this sort of issue would also involve massive dilution for current shareholders. Sir Alastair says the chances of persuading existing shareholders to part with yet more money is most unlikely.

Finally, the banks could accept a fixed-rate interest coupon at below cost of funds, together with an interest deferral with the aim of raising money on the capital market or the equity markets to repay the banks early in the next decade.

This was proposed by the company in September, but rejected because it does not, in the banks' opinion, entail sufficient pain for shareholders.

Given that there is no satisfactory solution, many analysts believe the British tendency to seek a compromise will prevail. Eurotunnel needs a radical solution. Many believe it will just limp on with a partial solution.