EUROTUNNEL, the Channel Tunnel operator, will be bankrupt within two years unless creditors agree to write off more than half its debt of €9 billion (£6.1 billion), it was claimed yesterday.

Jacques Gounon, Eurotunnel’s chairman, said the company could only cope with debt of €3.3 billion. He said: “If the debt is not drastically improved, Eurotunnel will not make it through the first quarter of 2007.”

While seeking huge concessions from creditors, M Gounon would not press for any dilution from Eurotunnel shareholders, whom he said have already suffered enough. French private shareholders speak for 62 per cent of the shares.

Mr Gounon argued that Eurotunnel’s market value is closer to €4 billion, less than half the nominal value of €9 billion.

He conceded that some shareholders would prefer Eurotunnel to slide into bankruptcy. But he said: “We have 18 months to find a solution.”

M Gounon’s pronouncements came as Eurotunnel announced a net loss of £570 million in 2004, blaming tough price competition from cross-channel ferries and low-cost airlines. Shuttle services revenues declined 7 per cent to £285 million, mainly because of intense competition in the truck market and a fall in Eurotunnel shuttle passengers.

The underlying loss narrowed from £148 million in 2003 to £127 million in 2004.

Eurotunnel remains crippled by interest payments, which totalled £298 million last year, compared with £318 million in 2003. M Gounon insisted that Eurotunnel remains a going concern despite its financial burden. Earlier this month, the company received a waiver to its credit agreement, allowing it to start renegotiating debt to reduce interest payments.

Eurotunnel is under pressure to restructure debt by the end of the year because it faces paying all interest in cash instead of the current mix of cash and more debt. Negotiations with creditors are expected to last up to eight months. In 1998, when Eurotunnel last faced bankruptcy, talks with creditors went on for 19 months.

M Gounon would not be drawn on the concessions he was willing to offer creditors in return for writing-down debt. He said: “I am determined to protect the interests of this company and to reduce the burden of the financial charges.”

M Gounon conceded that the banks could declare Eurotunnel in default, sack the management and assume control of the Channel Tunnel. But he said this was not the solution and creditors must accept the “tough reality” that the level of debt could not be sustained.

M Gounon was installed as chairman two months ago. He took over from Jacques Maillot, appointed chairman in 2004 after a shareholder revolt that led to the ousting of Eurotunnel’s British management.

Eurotunnel had been seeking to reduce its cost base under Project Dare, but the initiative was put on hold after the boardroom reshuffle. Project Dare will seek to increase margins from Eurotunnel’s core shuttle business by better aligning capacity to demand. Further cost savings will flow from reviewing contracts with subcontractors and suppliers and reducing administrative costs.

Eurotunnel has already set aside provisions of £36 million to cover redundancies and termination of subcontracts. Job losses are expected in the next few months. The company hopes that the headcount will fall through natural wasteage and voluntary redundancy.

In a hint of further trouble ahead, M Gounon said that the Channel Tunnel is 15 years old and would soon require significant spending on maintenance and investment.

LIGHT AT THE END OF THE TUNNEL?

• April 2004: Waiver to credit agreements allows Eurotunnel to start renegotiations with creditors
• Ad hoc committee of creditors includes MBIA, European Investment Bank, Franklin Mutual Advisers and Oaktree Capital Management
• Negotiations expected to last eight months
• From 2006 Eurotunnel will no longer benefit from stabilisation advances that protect cashflow by enabling up to £60 million in interest charges to be converted to debt
• Interest payments due in January 2006 and July 2006 render cashflow position particularly vulnerable
• From the first half of 2007 Eurotunnel will not be able to meet its contractual debt repayments

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