The Scotsman’s business editor recently quipped that the number of certainties in life had just risen from two to three. The familiar duo was of course death and taxes: the third, a financial crisis at Eurotunnel.
With more than £6bn of debts and with an operating profit unable to repay annual interest charges, Eurotunnel’s survival is due only to the political embarrassment that would follow its collapse, especially in 2007, a French presidential election year. As Eurotunnel has no realistic prospects of ever servicing its loans, only a debt for equity swap looks a viable solution. Or it would do but for the mass of politically influential French shareholders, who between them hold 80% of the stock and another £1.9bn of debt, and instead have forced the company into talks about its future.
Eurotunnel has continued trading because if the debt is ignored, it is able to make a healthy operating profit. The situation is reminiscent of that of Concorde, which Air France and British Airways operated at a notional profit because the entire design and build costs had been written off by their respective governments. However government-led debt relief for Eurotunnel is not only improbable in today’s climate: it would almost certainly fall foul of European Union rules prohibiting hidden subsidies.
If there is no agreement on restructuring the company, next January Eurotunnel is obliged to start to repay the capital sum of £9bn borrowed from banks for the initial construction. Eurotunnel has already stated that it will be unable to do so. The banks may finally exhaust all other options and be obliged to start running their investment themselves. The latest rescue plan involves reducing the £6.2bn debt to £2.9bn and issuing £1bn of convertible bonds, which could leave three financial institutions, Barclays Capital, Goldman Sachs and Macquarie in control of the company. It would also result in the existing, doomed Anglo-French structure being replaced by a French company with a British subsidiary, and the whole operation controlled from Paris. Some fear that a perilous situation could become steadily worse.
From our 2006 August e-newsletter
