Trouble paying the 'rent'

EURO DISNEY has the oldest problem in the book. Its loans are so large that no matter how successful the theme park becomes, it is virtually inconceivable that it can ever make enough money to finance its debts, never mind repay them. Excluding loans, the company just inched into the black last year. So the issue keeping everyone awake at night is how to cut the size of its debt mountain. Either new equity must be ploughed in to repay some of the loans or the banks will have to be persuaded to write off the bulk of the borrowings.

The numbers in last year's profit and loss account make the point. Last year Euro Disney had revenues of Fr5.7bn (now pounds 655m). General running and construction costs swallowed up Fr5.4bn, leaving a tiny profit. But 'rent' (interest charges on leased assets such as hotels) of around Fr1.7bn, plus depreciation and royalty payments to Walt Disney, meant the group made an operating loss of around Fr1.8bn.

Admittedly, the real coup de grace to the company's profits this time around was the decision to change accounting policies and write off all the park's start-up costs in one go.

That produced an enormous exceptional loss of Fr3.2bn which, with Fr400m of additional redundancy provisions, produced a whopping net loss of Fr5.3bn. Even without the exceptional charges, Euro Disney is not viable without financial restructuring. Costs can be cut a little to improve operating profits, but unless something is done about the 'rent', the company cannot survive.

That task is complicated by Euro Disney's diabolically intricate structure. The company does not actually own many of the key assets, such as the theme park and the hotels. These are the property of finance companies which lease them to Euro Disney. The 'rent' varies according to the finance companies' own debt repayments; so the payment is in effect an interest charge.

Moreover, different creditors have lent money to different parts of the venture. For instance, more than 60 banks are involved in the syndicate that lent money to the finance companies that own the hotels.

In all, the debts add up to almost Fr21bn ( pounds 2.4bn). Most of it is owed to French banks - mainly the recently privatised BNP and Banque Indosuez. The French state, a syndicate of around 60 international banks and convertible bondholders, are also big lenders.

On the plus side, the park's total fixed assets, the theme park and the hotels, are valued at about Fr22bn, fractionally more than the group's liabilities. But the market for hotels and theme parks, which is small anyway, is currently extremely depressed. So the true value in a fire sale might be much less.

Either way, there is almost nothing left for ordinary shareholders; the little remaining equity has been wiped out by this year's Fr5.3bn of losses and provisions. Under French accounting rules the company has net assets per share of less than Fr10; under stricter US standards, the figure is barely Fr2. All this makes the fact that the shares still trade at around Fr38 (370p) rather baffling.

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