Procrastination could save the day for Eurotunnel

INDUSTRY VIEW

Eurotunnel will not have much reassurance to give shareholders when it releases its 1995 results next Monday. Cross-Channel traffic is looking up a bit but there will be little progress to report on the negotiations with the company's banking syndicates over pounds 8.1bn of debts on which interest has been suspended.

After a dismal year, they will be treated to the usual knockabout stuff from Sir Alastair Morton, the perennially optimistic co-chairman, who has always insisted that the board has no intention of handing over the company's equity to the banks.

As one of the signatories to a Panglossian rights issue prospectus that lifted pounds 858m of new money out of shareholders' wallets in 1994, 15 months before the company in effect went bust, Sir Alastair's new-found role as shareholders' champion must leave some of them with rather mixed feelings, to say the least.

At 71p, the shares are worth little more than a tenth of their value in early 1994. Agreement on a solution to the company's problems has also been receding steadily, despite Eurotunnel's efforts to get the lead banks to agree the outline financial reconstruction plan it has drawn up.

When the crisis began last September, some of Eurotunnel's banks thought it would take six months to negotiate a deal and another year to push the agreement through the whole 220-strong banking syndicate.

How optimistic can you be? Seven months into the negotiations, it looks unlikely that an outline agreement with the banks will be concluded before the summer holidays, so that means a delay into the autumn at the earliest, since most of Europe packs up in July and August.

Even if the original guesstimate that a further year is required to get all the 220 bank lenders to sign proves correct, the reconstruction may not finally be agreed before late 1997.

The problem is that the nearer Eurotunnel moves to a formal signing by the whole syndicate, the higher the hurdles become.

Every single bank in the syndicate must vote yes to the refinancing. The temptation for individual banks to demand special concessions in situations of this kind is irresistible.

When Rupert Murdoch's News International was refinanced a few years ago, his empire was nearly destroyed because a single small American bank threatened on the last day not to sign.

So potentially serious is this blackmail problem for any corporate rescue that the Bank of England spent several years persuading large companies to put majority voting into the contracts governing renegotiations of their syndicated loans.

Eurotunnel did exactly that, so only a majority bank vote was needed to approve its 1994 bank refinancing and rights issue. Unfortunately, once Eurotunnel stopped paying interest, the loan agreements reverted to a requirement for 100 per cent approval.

In some rescues, banks have preferred long negotiations because they have allowed them to spread bad debt provisions over a number of years while profits are earned to pay for them.

This is probably not a factor with Eurotunnel, whose international lenders have made substantial bad debt provisions already, ranging from 20 to more than 50 per cent. NatWest, one of the four lead banks, is thought to have provided pounds 40m of its pounds 100m exposure.

From the lead banks' point of view, the fundamental cause of the delay is simply the difficulty of agreeing a proposal that has a chance of satisfying the diverse interests of a syndicate of 220 lenders.

Nevertheless, delay does have some useful side-effects. A view is growing among the banks that, having got this far, they might as well wait until the autumn, when the company will have another summer's tourist traffic under its belt and forecasts of future revenue will be more reliable.

(Those who expect Sir Alastair will depart then, because his contract runs out in October, are jumping to conclusions, because he has been asked by the board to stay on until negotiations are complete.)

Results this spring have certainly been looking good. Eurotunnel's poor marketing has shown signs of improvement and aggressive cut-price tactics on duty-free have been paying off in increased traffic.

Perversely, the better the forecasts for future years the more the banks are likely to push for a bigger slice of the cake and larger fees (to add to the pounds 200m they have already earned.)

That might explain why Eurotunnel is anxious to persuade the lead banks to approve its own restructuring proposals sooner rather than later.

The deal it wants is not a conventional corporate rescue in which debt is swapped for some form of equity, with the alternative probably a receivership.

Eurotunnel's preferred solution is a flexible structure that allows long- term revenue sharing. The company should from now on produce a positive cash flow, over and above operating costs, but excluding debt interest and repayments.

The idea is to persuade the banks to continue to underwrite the project, absorbing any further financial shocks.

As revenues increase, Eurotunnel would pay a higher proportion of its interest. As for the shareholders, at some as yet unpredictable moment in the next century, there would be money left over for dividends.

It is likely that, given a generous enough share of the surplus revenues, the banks will agree that it is pointless taking over the shareholders' equity. Such a move would be largely symbolic. There is, after all, pounds 8.1bn of debt and only pounds 700m of equity, and a wipe-out of shareholders' interests would cause the banks a great deal of political trouble, especially in France, where the majority of the shares are held.

Long-suffering as the shareholders have been over their investments in Eurotunnel, the question is whether these inevitable delays in the negotiations actually matter very much to them.

The answer is probably not. It simply will not make much difference because the prospect of dividends is so far into the future. On some projections, compounding of interest would prevent Eurotunnel's revenue ever catching up with the payments to the banks.

As for receivership, it would only make sense for the banks if they thought they could find a better management to run the remaining 57 years of the tunnel concession, and there is no sign so far that they want to do that.

A cross-border receivership would be messy, too, since French law is more sympathetic to the rights of shareholders - the message the banks took from the Eurotunnel board's decision to set in motion the appointment of mediators under French law.

If this were an ordinary rescue, Sir Alastair would be seen by now to be wearing the emperor's clothes: proclaiming how well covered his loans are while everybody knows he is completely naked and that the shares are worthless.

But Eurotunnel is not like any other refinancing. There is no doubt at all that in the long term the business itself will continue to operate, whatever happens to the bankers and shareholders.

And in the short term, there is little point in forcing the issue because nothing can be resolved until the company's commercial prospects are clearer. In the circumstances, a certain amount of procrastination probably benefits everybody.