Eurotunnel’s latest rescue plan blends fear, flattery and good old-financial engineering. The company’s existing capital structure is an untenable mix of fantasy and hard reality. The latter comes in the form of senior debt-holders, who have the power to force the group into administration. They will either roll over their exposure into the proposed structure or be paid off with the cash proceeds of £1.8bn of new senior debt.
Below them sit the tier 3 creditors, who are being asked to write off over 40 per cent of their outstanding claims. Then again, their subordination in the old structure made them little more than quasi-equity holders anyway. Down at the bottom lies the realm of fantasy: so-called “infra-junior” creditors and shareholders. Their stakes are effectively worthless, but they can cause a fuss.
A new £350m mezzanine issue is designed to pay them off. The infra-junior creditors contain several hedge funds who bought in at distressed levels, so talk of them taking a 90 per cent haircut should be treated with caution.
Shareholders, meanwhile, are offered some hope of a small dividend. How much cash will actually be available, however, remains to be seen. Even if the plan is approved, Eurotunnel’s net debt will still be about 12 times its last reported earnings before interest, tax, depreciation and amortisation. Assume a 6 per cent coupon and there appears to be precious little left over to distribute.
The rival proposal from Citigroup potentially offers more cash to creditors, but lacks the backing of existing management. The reason for that is clear. While, in theory, it would not dilute existing equity-holders, the higher debt burden would appear to take any chance of dividends off the table completely – leaving shareholders pretty much where they are now.
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