Eurotunnel is preparing to be declared insolvent as soon as this week if talks with holders of its lowest-rank debt fail by a deadline of Tuesday.

The talks are due to take place on Tuesday and Wednesday in Paris in an effort to forge a deal between the Channel tunnel operator and holders of the lowest-ranked subordinated debt, or bondholders.

The group has rejected a restructuring plan struck between the company and more senior creditors and revealed on May 31.

The company believes that if its permission to hold talks expires tomorrow without any agreement reached with the bondholders, then auditors could seek to have the venture declared insolvent ahead of a shareholder meeting set for July 27.

However, other parties to the restructuring doubt the courts would declare the company insolvent because, despite its £6.18bn ($11.37bn) debt, it has enough cash to last until January.

The French courts could appoint an official to devise a restructuring plan, as happened during a previous Eurotunnel restructuring in 1998.

An adviser to the bondholders pointed out that Eurotunnel had a history of seeking to create an air of crisis around restructuring deals in the hope of forcing creditors into an agreement.

Eurotunnel said last night that it wanted to continue talks and wanted to reach an agreement.

“The purpose of talks is to do a deal,” it said. “But other preparations are now in place for a worst-case scenario.”

Any insolvency would be one of the largest ever in either the UK or France. However, it is not clear exactly how an insolvency would be handled.

Insolvency could be handled through either the French or English courts, and there could be questions over interpretation of the insolvency provisions in the 1986 treaty on the tunnel’s building.

Senior creditors could eventually apply to take over the tunnel’s operation to pay off the money owed.

The bondholder adviser criticised Eurotunnel’s warning, saying it was a negotiating ploy.

However, the company pointed out that in April its auditors, KPMG, had launched an alert
procedure under French law, to warn that Eurotunnel might
have to cease operations during 2007.

If talks had not succeeded by the Wednesday deadline, there would be no prospect of achieving a deal before an extraordinary meeting scheduled for July 27, and the auditors would then be obliged to tell the French courts that the company was insolvent.

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