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EUROTUNNEL PROJECT
The Eurotunnel Project
was initiated in 1984.
1984
Banque Indosuez, Banque Nationale de Paris,
Credit Lyonnais, Midland Bank, and National
Westminster Bank (together, the Arranging
Banks) presented to the governments of the
United Kingdom and France a report detailing
how a xed link across the Channel, consisting
of a twinbore rail tunnel, might be project
nanced entirely with private capital.
Historical Background
Common shareholders:
Eurotunnel PLC i(United
Kingdom)
Eurotunnel S.A. (France)
Joined together in a general
partnership (hereafter referred to
as Eurotunnel).
They would be paid for on a lump-sum basis. Transmanche Link would realize all the savings if the lump-sum
works were delivered under budget, but would have to pay the full cost of any cost overrun.
Transmanche Link would be reimbursed for its direct costs and paid a prot margin equal to about 12 percent of
the value of the procurement items.
Construction
Transmanche Link would be held liable for damages of about 350,000 per day for delays up to 6 months,
and 500,000 per day thereafter if the Eurotunnel Project was delayed beyond the nal completion
deadline.
The obligations of Transmanche Link would be secured by a performance bond equal to 10 percent of the
total value of the contract, which would be released upon completion of the Eurotunnel Project.
In addition, 5 percent of the amount due to Transmanche Link as progress payments would be withheld or
covered by a performance bond during the construction period. The payments or the bond would be
released in two installments, 12months and 24 months following completion of the Eurotunnel Project.
The joint liability of each of the French parents and the several liability of each of the British parents was
limited to 50 percent and 10 percent, respectively.
Transmanche Link would be liable for delays and cost overruns caused by accidents or ooding. However,
it would not be liable for delays or cost overruns caused by (1) changes in specications made by
Eurotunnel, (2) actions taken by the British or French governments, or (3) bedrock conditions that turned
out to be different from those Eurotunnel had determined to be reasonably expected.
5
Project
Financing
Project Financing
Eurotunnel estimated that it would cost
approximately 4.8 billion to build the
Eurotunnel System:
High speed rail service would be available between London and both
Paris and Brussels.
United Kingdom gross domestic product would grow at 2.15 percent p.a. between 1985 and 2003 and at
2.00 percent p.a. between 2003 and 2013. The growth rate in traffic was assumed to decrease each year
after 2013, reaching zero in 2042.
No alternative fixed link across the English Channel would become operational before 2042.
The tariffs the Eurotunnel System charges would, on average, equal the ferry tariffs on the Dover-Calais
route and would remain constant in real terms.
Rail usage charges would conform to the specifications of the railway usage contract, and the high-speed
railway linking Brussels, Paris, and the Eurotunnel System terminal in France would be operational by the
time the Eurotunnel System opened.
Eurotunnel would be permitted to make duty-free and tax-free sales to shuttle passengers (the principal
source of the ancillary revenues reported in Table 18.4).
Traffic and revenues would conform to the traffic and revenue projections prepared by Eurotunnels
traffic and revenue consultants.
Key Assumptions
In February 1986, however, the borrower had not yet been formed, the construction contract had not yet been
drafted, and the governments of the United Kingdom and France had not yet granted the Concession to CTG
and FM. Therefore, it would have been premature to
Arranging Banks felt it was essential for them to augment their underwriting commitmentsrumored to be
approximately 4.3 billionin order to secure commitments for the full 5.0 billion budgeted for total credit
facilities. They believed that arranging these additional commitments would preserve political momentum and
demonstrate to the equity market that the Eurotunnel Projects entire debt financing was locked up.
Conditions Precedent to Signing the Underwriting Agreement
The following events would have to occur before the underwriting banks would formally enter into the
underwriting agreement:
1. The British and French governments would have to grant the Concession.
2. Eurotunnel S.A. and Eurotunnel PLC would have to be incorporated, and their general partnership would
have to be formed.
3. The construction contract would have to be negotiated and signed.
4. The United Kingdom Parliament would have to pass the Channel Tunnel Bill in order to ratify the treaty
and the Concession.
5. The French National Assembly would have to pass parallel legislation.
6. An order authorizing the acquisition of the land for the French terminal would have to be issued.
7. A site suitable for dumping the earth and rock excavated during tunnel construction would have to be
obtained.
8. An equity issue (Equity Offering II) in the amount of 150 million would have to be completed.
Projected Loan Facility
Terms and Conditions
1. Amount
2. Use of proceed
3. Conditions precedent to
drawdowns
4. Availability, repayment, and
refinancing
5. Fees
6. Interest
7. Security
8. Negative pledges
9. Events of defaults
10. Default cover ratios
11. Third party loans
12. Multicurrency options
In addition to dividends, Eurotunnel offered travel privileges to individual subscribers to Equity Offering
III, on the following basis:
In Paris, condence in Equity Offering III was strong. The mood in London, however, was cautious.
Nevertheless, Equity Offering III was successfully completed.
10
Sensitivity
Analysis
Sensitivity Analysis
11
Subsequent
Development
Subsequent Development
Originally scheduled to open in May 1993 but it delayed until May 6, 1996.
Originally expected to cost 4.8 billion but ended 10.5 billion
Lead to protracted dispute between Eurotunnel and Transmanche Link which delayed construction
By summer 1994, a fare war was threatening to erupt. Ferry operators were expected to cut fares
sharply
By 1995, aggresive airline advertisiing from London to Paris led to worse situation
By 1996, debt restructuring agreement has been held in order to satisfy creditors banks (225) and
shareholders (760000)
By 2006, French court placed Eurotunnel in bankruptcy, restructuring plan has been made to reduce
Eurotunnels debt by 54%, from 6.2 billion to 2.9 billion. The French bankcuptcy court approved the
restructuring plan in January 2007.
Following the restructuring, Eurotunnel was able to announce a small net profit in 2007, of 1 million,
for the first time in its existence. Half year earnings for 2008 rose to 26 million (20.6m). The net
profit for 2008 was 40 million and this allowed Eurotunnel to issue its first ever dividend of 0.04 per
euro value.
CONCLUSION
Conclusion
The Eurotunnel Project illustrates the cost overrun risk and economic risk that accompany large, ambitious
transportation projects. This is particularly so when there are competing modes of transportationin this case,
ferrieswhose operators may reduce fares in order to compete.
In spite of its financial difficulties, as of the date regular passenger service began, the European financial
community generally felt that the Eurotunnel Project would continue to operate. However, it recognized that
Eurotunnel would require a financial restructuring to reduce its debt burden.18 Subsequent events would
appear to validate these concerns. Ultimately, the two governments and the creditor banks have so much at
stake that the Eurotunnel Project is probably too bigand too visibleto be allowed to fail.
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