When Jacques Gounon, Eurotunnel’s executive chairman, presented details of a deal between Eurotunnel and holders of the key middle tiers of the Channel tunnel operator’s debts on Wednesday, he did his best to make the announcement sound like the last word in the long-running saga of the company’s restructuring.
He said the deal was a last chance for the heavily indebted company and that the only alternative was bankruptcy, which would leave both the company’s shareholders and holders of the lowest £1.9bn of its £6.18bn ($12.7bn) debt – known as the infra-junior debt – with nothing.
Yet mounting criticism from those who feel short-changed by the announced deal suggests that Mr Gounon may face real difficulty persuading both shareholders and infra-junior creditors to back the deal.
More than half the shareholders voting on the deal at an annual meeting on July 12 will have to back the deal for it to succeed, while 75 per cent of infra-junior creditors will need to back an agreement before its planned implementation this autumn. If either side rejects the deal, a new agreement would have to be worked out in the short time before Eurotunnel runs out of cash – in January.
The deal does, however, leave some questions unanswered.
It is unclear how a bankruptcy procedure under the rules laid out in the 1986 Treaty of Canterbury would work and how different debt levels would be treated in such circumstances. It is also unclear how much existing shareholders’ stake in the company – likely to be 13 per cent – will be worth.
That meant that yesterday all parties involved were presenting fierce but mutually incompatible arguments to say that the division of the company’s value outlined by Mr Gounon on Wednesday was either entirely fair and natural or utterly unjust to one party or another.
An adviser to the infra-junior group described the existing restructuring plan as “dead in the water”, saying that none of the infra-junior group would vote for it.
An adviser who had worked on the company’s restructuring, meanwhile, said the infra-junior creditors were being greedy and the only question was how greedy they would be.
At the heart of the arguments are two questions – how much Eurotunnel is worth and how the value should be distributed.
The deal announced on Wednesday reduces Eurotunnel’s existing £6.18bn debt to £2.91bn, keeping the most senior debt levels intact. It introduces a new, convertible instrument with a value of £1bn which will be given to holders of £1.8bn of debt from the highest levels which the company cannot repay in full.
Between 2009 and 2011, unless the company has the funds to pay a significant premium to buy out holders, the instrument will convert into shares, diluting existing shareholders’ stakes to just 13 per cent.
Wednesday’s agreement was struck between the company and the Ad Hoc Creditors’ Committee, which represents the majority of holders of the £3.95bn debt in the middle of the capital structure straddling the levels that will be retained and repaid in full and those that will become owners of the convertible bond.
The company has not yet held any serious talks with the infra-junior creditors and appears to want to offer them no more than around £150m.
Infra-junior creditors have rejected the deal as unfair, saying that if shareholders are to retain 13 per cent of the company, infra-junior creditors deserve a larger slice of the company. They also claim that the company might be worth more than the implied £4bn value of Wednesday’s deal. They claim bankruptcy might offer them a better deal than that apparently on offer at present.
Yet Eurotunnel is intensely conscious that its mainly French shareholders will be dismayed by the already substantial likely future dilution of their holdings and any deal that placated bondholders by reducing shareholders’ stakes could make shareholders vote against the deal.
Mr Gounon is likely to have to do a lot more persuading.
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