Chunnel backers get tough: Underwriters demand 30 per cent discount

POTENTIAL underwriters to Eurotunnel's proposed emergency rights issue next month are threatening to shun the fragile rescue deal unless the new shares are priced at a discount of at least 30 per cent to the market price.

The rights issue is expected to raise as much as pounds 900m from shareholders, once bankers to the company have agreed to put up around pounds 700m of further debt. Without it, the Channel tunnel operator will run out of cash next month.

The underwriters guarantee to buy shares that are not taken up by existing shareholders, and they do so for a fee. But they have told the company in no uncertain terms that, given the poor short-term prospects for the project and the likely size of the money-raising exercise, they will want the shares to be priced at a discount of twice or three times the usual size for share issues in London.

As the final touches are put to the latest money-raising exercise, advisers were admitting that a large discount would be needed. 'It would be right to assume that the discount is going to be much higher than the norm,' said one. He also made it clear that the rights issue, which may be announced towards the end of this week, will only go ahead once bankers to the project agree to put up pounds 700m of debt finance.

According to one banker close to the frantic discussions, ' pounds 700m is really the minimum figure we will accept from the banks before asking shareholders to put up any more money'.

The company's advisers have been considering contingency plans, including a deferral of interest payments, in case the pounds 1.6bn capital raising does not come off as planned.

Shares in Eurotunnel fell 30p on Friday to close at 375p as the market nervously digested stories that the company was only managing to raise pounds 600m from its bank lenders. By the end of the day, however, sources close to the company were more confident that the pounds 700m figure would be reached.

One adviser to the group this weekend insisted the negotiations with the banks were moving towards a successful outcome. 'Some of the stories going around have been between 24 and 48 hours out of date,' he said.

There have been frantic efforts in the past few days to persuade unwilling Japanese banks to join the latest round of funding. The Bank of England is understood to have put pressure on its central bank counterpart in Japan to bring recalcitrant Japanese banks into line.

Advisers say they have not yet taken a decision on the pricing of any rights issue, which will be conducted jointly in London and Paris. 'The size of the discount will have to take into account what is required in the two markets,' said one.

In London, the rights issue will be sub-underwritten by financial institutions, such as pension funds and insurance companies, many of whom are not yet shareholders in the project. In France, the risk will be taken entirely by the banks who underwrite the share issue. At present around 75 per cent of the company's shares are held on the French register.

Warburg Securities, one of Eurotunnel's banking advisers, busily held institutional presentations involving co-chairman Sir Alistair Morton, in the City of London last week. 'The reception has been very good,' said one attendee, 'although reports of the problems the company has been having in getting the banks in line have caused us to remain more cautions than we would otherwise have liked.'

Eurotunnel told its bankers more than 18 months ago that it could not possibly get a rights issue off the ground until it was close to opening its services. The company said that, due to its many broken promises, it would not be able to raise more money from shareholders until it had revenue coming in.

The tunnel only began operating freight services last week.