Financing Eurotunnel - · PDF fileFinancing Eurotunnel Michael Grant ... Tunnel Boring Machine (TBM) - Eurotunnel was cut using 11 of these machines (Eurotunnel)

46 Japan Railway & Transport Review • April 1997

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Copyright © 1997 EJRCF. All rights reserved.

Financing Eurotunnel

Michael Grant

Background

Eurotunnel is the largest privately-financed infrastructure in history by along way. In what it has achieved it hasbeen a stunning success—in its currentfinancial situation it is obviously also afailure at this stage if measured by returnon investment. This makes Eurotunnelunique and interesting in all sorts of ways.The intention of this article is to take youthrough the history of how the ChannelTunnel Project actually was made to hap-pen, particularly in the financing area,what went wrong, and so far as it is pos-sible without taking unfair advantage ofhindsight, to draw some lessons whichmay be useful for other privately financedinfrastructure projects.Eurotunnel is the embodiment of the ex-traordinary engineering feat that is theChannel Tunnel, a feat that has capturedthe public imagination ever since the ideaof a Channel Tunnel was first seriouslyconsidered 200 years ago.The Channel Tunnel is comprised of three

tunnels connecting Britain to continen-tal Europe from terminals in Folkestonein Kent, and Coquelles near Calais innorthern France. The three tunnels are50-km long, with 38 km under the sea.They are bored some 40 meters belowthe seabed in a layer of impervious chalkmarl. Two are single-line rail tunnels, thethird is a smaller service tunnel. It runsbetween the other two and acts as a per-manent safe haven.The Channel Tunnel took 7 years to buildand is still the longest undersea tunnel inthe world. Some 8 million m3 of spoilwere excavated and used to create a newpiece of land at the foot of the cliffs nearDover, and a new hill in northern France.

Train Services

Four types of trains use the Tunnel:• Eurotunnel’s own Le Shuttle services for

cars, coaches and caravans• Le Shuttle Freight for trucks (tempo-

rarily suspended)• Eurostar, the passenger service oper-

ated by the British, French and Belgianrailways

• Rail freight services operated by theBritish, French and Belgian railways

The first Le Shuttle carrying passengersand their cars journeyed to France on 22December 1994.Each shuttle has a locomotive at each endand travels at 140 km/h. Normal cross-ing time is 35 minutes, and the serviceoperates 24 hours a day every day of theyear. In 1996, Le Shuttle became the mar-ket leader on the Dover/Folkestone toCalais car crossing, carrying a total2,076,954 cars and 57,962 coaches.A quarter of the customers are businesspeople, compared with only 10% of themarket overall. Roughly the same per-centage are families, some 22% areyoung couples and the rest, about 28%,are older couples or retired people. Theytravel for short breaks, long holidays orjust day trips. Some buy their tickets wellin advance, others just enjoy the facilityof turning up and buying their ticket onarrival at the terminal. All, however, en-joy the speed and facility of the service.

View of two train tunnels and central service tunnel under construction at French side (Eurotunnel)

47Japan Railway & Transport Review • April 1997Copyright © 1997 EJRCF. All rights reserved.

Long History

The first idea for a Channel Tunnel wasconceived in 1802; tunnelling was actu-ally begun in 1882 but was soon aban-doned. Then in 1974, a mile of tunnelwas completed before the governmentsabandoned the project again because ofincreasing cost estimates.In 1985, the French and British Govern-ments issued an invitation to submit pro-posals for a fixed link—not necessarily atunnel—between England and France.Contenders were given 6 months to sub-mit an incredibly detailed set of plans (thepaperwork filled 2 trucks). There werethree or four serious contenders and theEurotunnel proposal was chosen in Janu-ary 1986, probably because it was tech-nologically the simplest and financiallythe most robust. In the light of what wenow know to have happened, this mayseem surprising, but it is not difficult tospeculate what might have happened hadone of the other proposals been chosen.

Contract Complexities

The Channel Tunnel proposal was origi-nally conceived as a combination of twofunctions: financing and construction, soit is natural that the two groups of pro-moters were banks and constructioncompanies. The construction side was

handled by a massive consortium of 10contractors called TransManche Link orTML for short, together with five banks,making 15 founder shareholders (Table1) who put up the initial equity of £47million (Equity 1). The founder share-holders were evenly divided between En-glish and French, like almost everythingelse in this project.It is important to look at the network oflegal contracts (Fig. 1) that define theproject because in the early days

Eurotunnel as a company did not exist.All there was, was a series of contractsand a number of dedicated staff all ofwhom were on secondment from the in-terested parties.The Construction Contract outlined with-out any great definition, most of the en-gineering work not just in digging thetunnel but also in setting up the physicalside of the operations. This was a de-s ign-and-bui ld contract betweenEurotunnel and TML.The Anglo-French Treaty and the Conces-sion set the framework within whichEurotunnel operates. Article 1 of the Treatystates that, ‘The Channel Tunnel Link shallbe financed without recourse to govern-ment funds or to government guaranteesof a financial or commercial nature’. Thiswas the only basis on which British PrimeMinister Margaret Thatcher would acceptthe project. The Concession was origi-nally for a period of 55 years but was laterextended to 65 years. It expires in 2052and Eurotunnel then has to hand back the

Figure 1 Project Contractual Structure

RAILWAYS

INSURERS

SHAREHOLDERS

MAITREd'OEUVRE

FRENCHGOVERNMENT

LENDERS

UKGOVERNMENT

CONCESSION

TREATY

IGC

CREDIT AND RELATEDFINANCING AGREEMENTS

PARTNERSHIP & CORPORATESTRUCTURE AGREEMENTS

RAILWAY USAGECONTRACT

MdO CONTRACT

SAFETY AUTHORITY

INSURANCESEUROEURO

TUNNELTUNNEL

CONSTRUCTIONCONTRACT

TRANSMANCHELINK

Table 1 Promoters and Founder Shareholders

Construction Companies (Contract with TML for delivery of operational system)� FIve UK Companies (TRANSLINK)� Five French Companies (TRANSMANCHE)

Banks (Arranging Eurotunnel Credit)� Two UK Banks (Midland, Natwest)� Three French Bank

(Credit Lyonnais, Banque Nationale de Paris, Banque Indosuez)




system in good working order. The Treatyprovided for the setting up of a bi-nationalIntergovernmental Commission (IGC) andSafety Authority who monitor Eurotunnel’scompliance with the Concession, andwho have exercised considerable powerover Eurotunnel’s operations.The Railways Usage Contract providesEurotunnel’s only committed source ofincome. Under this Contract, Eurotunnelis required to make half of the tunnel ca-pacity available to the British, French andBelgian railways for their Eurostar andfreight trains. In return, the railways paya fixed charge and tolls based on the vol-ume of traffic passing through the tunneltoge ther wi th a cont r ibu t ion toEurotunnel’s operating costs. There is aminimum charge level, a mechanism toensure a guaranteed level of cash flowto Eurotunnel over the first 12 years ofoperation. The Contract will provide35%–40% of Eurotunnel’s expected rev-enues.The Partnership and Corporate StructureAgreements govern the relationship be-tween the various subsidiaries within theEurotunnel Group, and provide for a JointBoard for the Group.The Maitre d’Oeuvre (MdO) is an inde-pendent Consulting Engineer who ad-vises the IGC, the banks and Eurotunnelon construction safety, etc.

The Concession was awarded by the Brit-i sh and F rench government s toEurotunnel in January 1986. One of thefeatures that led to the award was the fi-nancing plan and the very early commit-ment in principle by 31 leading banks tounderwrite the debt part of the funding.

Critical Period

The critical period in the formation ofEurotunnel was between January andSeptember 1986 when the 10 construc-tion companies and 5 banks negotiatedamong themselves two of the key con-tracts, namely the Construction Contractand the detailed term sheet for the creditfacilities. A private placement of shareswith institutions (Equity 2) was launchedin October 1986. This reduced the 15original promoters to minority sharehold-ers.One key question that could be asked iswho represented the future shareholdersduring that critical period to September1986? The banks argued that they hadto represent Eurotunnel in dealing withthe construction companies. There werealso the equity advisers who had to con-sider the effects of both the ConstructionContract and the banks’ term sheet on theeconomics of the project and on their

ability to write a prospectus and under-write a significant equity issue. Whoeverdid the job, there was no strong repre-sentative of the future shareholders to ne-gotiate the two key contracts at arm’slength with the contractors and the banks.

Increasing Equity

The completion of Equity 2 was a cliff-hanging saga and it almost failed. Withhindsight, institutions were being askedto take more risk than they were preparedto accept. The legislation to ratify theTreaty and bring the Concession intoforce was not in place, the Credit Agree-ment was neither negotiated nor commit-ted, the contract with the railways wasstill only outline terms and conditions(again not negotiated by the future share-holders) and the design of the project wasa long way from completion. There wasalso an approaching general election inthe UK which could have meant a seri-ous delay if there had been a change ofgovernment. All-in-all, the reluctance ofinstitutions, particularly in the UK wherethere was considerable opposition to theproject, was understandable.There were boardroom changes in early1987 which brought Sir Alastair Morton inas the UK Co-chairman of the EurotunnelJoint Board alongside André Bénard whowas already French Co-chairman.One of Alastair Morton’s first steps wasto recommend that the planned launchof the Equity 3 public issue should bepostponed until after the summer of1987. Eurotunnel needed this time toreduce the key risks still outstanding atthe time of Equity 2. There was a gen-eral election, which meant a delay incompleting the UK parliamentary pro-cesses until the end of July. The comple-tion of the Railway Usage Contract tookplace around the same time. This was adifficult and well publicized negotiation.

Tunnel Boring Machine (TBM) - Eurotunnel was cut using 11 of these machines (Eurotunnel)


Banking syndicate

The European Investment Bank’s (EIB)participation as a co-financier in theproject was a vital signal of European sup-port for the project. An agreement wassigned in September and greatly assistedthe loan syndication which had to becompleted successfully before the Equity3 issue could be launched. Eurotunnelcould not afford to have reports of reluc-tance in the banking community aheadof the approach to the equity market.However, one result, was a much largersyndicate of banks than anyone wanted.The group of 50 banks who underwrotethe deal, syndicated it very successfullyto over 200 banks. Eurotunnel was grate-

ful for the support, but it has nonethelessmade the task of managing the CreditAgreement much more difficult. The loanagreements were completed in Octobersubject to the equity issue going ahead.

High- Speed Line

One of the most helpful things leadingup to the flotation was the announcementthat the high-speed line, joining the Tun-nel to Paris, Lille and the Belgian border,would definitely go ahead. Eurotunnelhad been lobbying hard for this and itwas vital to the success of the sharelaunch since it reduced the London toParis journey time to 3 hours, making theTunnel very competitive with the airlines.

After completion of the funding arrange-ments in 1987, it was generally thoughtthat 1988 would be a quieter year on thefinancial side while the tunnellers got onwith their work. However, the first signof the difficulties of managing such acomplicated loan agreement and largebanking syndicate became evident rightaway. Bank funds were only availableafter nearly all the equity funds had beenspent.

Unforeseen Problems

In the financing package put together in1987, there was a 25% cushion which mostparties thought was more than sufficient.What went wrong? First, tunnelling

Aerial view of Folkestone Terminal (Eurotunnel)




progress was initially poorer than expected(due in part to imprecise specification ofthe tunnel boring machines). The contrac-tor had also underestimated the challengeof organizing the logistical support for theboring machines and the cost controls werenot wholly adequate.Second, there were some changes in theterminal and fixed equipment work.Third, the rolling stock costs had beenseriously underestimated. The rollingstock itself was more complex than ini-tially conceived and the market was verytight, resulting in higher than expectedbids from suppliers. In addition, TML hadmade large claims for additional expensesand this affected the cost forecasts.From mid-1989, Eurotunnel had tostruggle to retain access to the CreditAgreement facilities and from October1989, the banks had to waive a numberof breaches of the Credit Agreement.It took almost 18 months to develop andimplement the second round of financ-ing in November 1990. There was pres-sure from the banks to go to the marketearlier, nevertheless the rights issue (Eq-uity 4) was postponed until the first tun-nel breakthrough, which provided abackdrop for a positive reaction. Thebanks’ concerns were met by putting inplace a trail-blazing 9 month uncondi-tional standby underwriting agreement inMay 1990. This satisfied the banks thatequity would be available. In the end,breakthrough was achieved two daysbefore the close of the equity issue.The syndication of the planned additional£2 billion credit facility was anotherEurotunnel cliff-hanger, and it was onlywith considerable help from the four agentbanks (Midland, Natwest, Credit Lyonnaisand Banque Nationale de Paris) that afunding level loan of £1.8 billion wasreached. EIB was again very helpful inagreeing that its £300 million parallel linecould be considered additional funding,thus getting over the £2 billion target.

Additional Claims

During 1992, difficulties started to appearagain, as TML launched a claim for ad-ditional construction costs of some £1.5billion. Eurotunnel considered this sooutrageous that it went to the DisputesPanel set up under the Construction Con-tract. However, the Panel ruled that thematter should be dealt with at a higherlevel by the Arbitration Tribunal. In themeantime, Eurotunnel was compelled topay £50 million a month to TML as in-terim funding. This was a severe blow,although it was reversed when the dis-pute was eventually considered by theArbitration Tribunal.It was becoming evident that, whileEurotunnel had sufficient funds to open,there would be a need for further fundsafter opening, mainly to pay bank inter-est until cash flow breakeven.Again, Eurotunnel had to operate underwaiver from the banks and wanted abridging arrangement to defer any equityfunding, if it was needed, until after thefirst full summer of operation. A longwaiver was agreed together with a

programme to develop a funding planwith the banks. The usual debate fol-lowed about the needs for equity, theamount and the timing.After considerable discussions, Eurotunnelreluctantly agreed to raise equity at oraround the date of the official inaugura-tion by Her Majesty, Queen Elizabeth IIand President Mitterrand in May 1994.The target was broadly 50/50 debt and eq-uity.The final problem was that the construc-tion companies were behind schedulemaking negotiations more difficult forEurotunnel. This led to an agreement inJuly 1993 to separate the claim from theconstruction work, while Eurotunnelwould take on much of the commission-ing to proceed from the completed tun-nel to a fully operating company.The site was handed over to Eurotunnelin December 1993. The contractors’ mainclaim was settled in April 1994 consider-ably reducing the uncertainty for existingand potential investors. There was also aclaim from Eurotunnel ConsortiumWagon Group (ESCW), led by Bombar-dier, for additional costs on Le Shuttlewagons. This was settled in November

Table 2 Equity Issues (FFr10 = £1)

£ Million Timing

Equity 1 (Founder Shareholders) 47 September 1986

Equity 2 (Private Institutional Placement) 206 October 1986

Equity 3 (Public Issue) 770 November 1987

Equity 4 (Rights Issue) 566 November 1990

Equity 5 (Rights Issue) 793 May 1994

Units Issued to Bombardier (ESCW Settlement) 35 June 1994

Exercise of Warrants and Options 17 June 1994

2434

Potential Additional Equity: Final Exercise Date

Founder Warrants (Underwritten in 1994) 48 June 1995

1993 Warrants (Issued to Unit Holders) 158 October 1995

1992 Warrants (Issued to Underwriting Banks) 25 March 2000

Bank Warrants (Still to be Listed) 37 March 2000


1993.A prerequisite for the launch of the rightsissue in 1994 (Equity 5) was obtaining thefirst operating certificate from the IGC. In-vestors had to know that the system worked.A certificate covering all four services us-ing the Tunnel would have been preferable,but only the initial certificate for Le ShuttleFreight was awarded, and they were barelyoperating.On the debt side, these project milestoneswere also important, but in addition thebanks, particularly those in Japan, wantedevidence of continued official support forthe project. After prolonged discussion,the two governments agreed to extend theConcession by 10 years and Eurotunneldropped certain claims against the gov-ernments. This was an important signalfor the banks.

New Funding Round

The 1994 round of funding added a newfeature to Eurotunnel’s financing—knownas Senior Debt. Many alternatives wereconsidered in a series of discussionswhich developed into one of the mostintense and prolonged arguments of theproject’s history—mostly between thebanks themselves.Table 2 shows the equity issues. The eq-uity issues were larger than by normalstandards of the equity market, and it wascreditworthy that after one sizable equityissue, Eurotunnel succeeded in returningto the market twice with further very largeissues. The warrant issues listed underpotential additional equity sources arenow history. The first one, the FounderWarrants was successful because TML wasobliged to take them up as part of thesettlement. The second—£158 milliondue in October 1995—did not succeed,because the share price was too low. Thepurpose of issuing the original warrantswas to interest French investors since thetravel privileges offered to shareholders

were only really of interest to the British.This is just one example of many enor-mous complications involved in makinga bi-national issue and dealing with regu-lations of the London Stock Exchange aswell as the Bourse de Paris.

Debt Structure

Table 3 shows the debt structure. Theloan is currently structured in 12 tranchesto accommodate different currencies anddifferent types of loan. Administering thisinnocent-looking structure even withouta crisis in the company is a very compli-cated task. The problem is that no mat-ter how hard lawyers try to account for

Unloading car from tourist shuttle (Eurotunnel)

Table 3 Debt Structure(FFr10 = £1 = US$1.50)

� £6.8 Billion Junior Credit facilities(Advances and Letters of Credit)

� Parallel Loans – EIB £300 Million

– ECSC £200 Million

� £647 Million Senior Credit Facilities (Advances)

� Co-Financing Facilities – EIB £1 Billion

– Credit National FFr2 Billion(Originally FFr4 Billion)

The co-financing facilities are secured by Letters of Credit under the JuniorCredit facilities.

They are not additional funding but give Eurotunnel access to long-term fixedrate funding.




Michael Grant

Mike Grant is a Chartered Civil Engineer and a Fellow of the Association of Corporate Treasurers. He has an MBA special-

izing in finance. Since joining Eurotunnel in 1987 as a Senior Financial Analyst, he has held the positions of Head of

Investor Relations and, most recently, Corporate Finance Manager. In his current role as Group Treasurer, he is respon-

sible for the Treasury, Corporate Finance and Bank Relations departments.

� The Plan must ensure thatEurotunnel’s capital structure issufficiently robust to accommodatewide variation in financial perfor-mance in the years ahead.

� The plan relates to an estimated$8.7 billion of Junior Debt andunpaid interest outstanding as ofOctober 1996.

� A debt equity swap at 130p perUnit. This will reduce outstandingJunior Debt by £1 billion. A further£3.7 billion of Junior Debt will beconverted into new instruments tobe created as part of the restruc-turing plan. Indebtedness will bereduced by the redemption in Unitsof £1 billion of these instrumentsby 2003.

� The interest rates on the JuniorDebt and new instruments arefixed for 7 years at levels signifi-cantly below market rates.

� Under the terms of the restructur-ing plan, interest that cannot bepaid when due in cash is settledwith notes which do not bearinterest for the next 9 years.

� The restructuring plan also resultsin a significant lengthening of thematurity profile of Eurotunnel’sdebt.

� Existing Eurotunnel shareholderswill be diluted by the restructuringplan, but they will have the oppor-tunity to retain a clear majority ofthe enlarged equity.

� Following the debt equity swap,existing shareholders wouldretain approximately 54.5% ofthe enlarged equity. However, itis intended that shareholders willbe able to participate in thisissue on a basis to be agreed.

� Shareholders’ interests may bereduced further to 39.4% by 31December 2003 as part of therestructuring. However, existingshareholders will be issued withfree warrants entitling them tosubscribe, prior to that date, for aproportion of the Units that wouldotherwise be issued to redeeminstruments issued to the banksas part of the restructuring. Thisgives shareholders the opportu-nity to increase their stake to51.3%, in addition to any partici-pation by existing shareholdersin the initial debt equity swap.

� The ability to start payingdividends and their subsequentgrowth will depend in the firstinstance, on Eurotunnel’soperating performance over thenext 10 years. Strong operatingperformance should allow a firstdividend to be paid within thattime frame.

Table 4 Restructuring Plan

every eventuality, no matter how manyhundreds of pages of clauses they draft,the documentation simply cannot meetthe test of reality. So what happens isthat exemptions and waivers have to besought, and frequently the documenta-tion itself has to be changed, whichmeans drawing lawyers back into theprocess at large cost. In principle thisshould be done reasonably smoothly butwhen there are more than 200 banksamongst whom agreement is required,the difficulties can only be imagined.

Restructuring

Increasing expenditures and delayedopening led to further difficulties and on14 September 1995, Eurotunnel an-nounced suspension of interest paymentsfor 18 months.Difficult negotiations with the banks ledto the appointment of an independentarbitrator in February 1996. Finally, inOctober 1996, the Steering Group rep-resenting the syndicate of 220 banksagreed in principal to the restructuringplan outlined in Table 4.Based on this agreement, a final settle-ment about debt restructuring was ex-pected to be reached with the syndicateof 220 banks and shareholders in early1997. During the summer and autumnof 1996, both passenger and freight traf-fic through the Tunnel was growing fairlyrapidly and prospects seemed better.However, a fire in the England-boundTunnel on 18 November, thought to haveoriginated from a truck, was a seriousblow, resul t ing in the continuedsupension of freight traffic and restrictedpassenger services.In February this year, Eurotunnel and thebanking syndicate agreed to postpone afinal settlement until the autumn. �

Documents

Financing Eurotunnel - · PDF fileFinancing Eurotunnel Michael Grant ... Tunnel Boring Machine (TBM) - Eurotunnel was cut using 11 of these machines (Eurotunnel)