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CASE STUDY 18:

The Eurotunnel Project

Rachma Pratiwi (14414011)


Ilham Muhammad Lufi (14414034)
Ariosa Fakhri R.R (14414039)
OUTLINE
Historical Background
The Eurotunnel System
Project Ownership Structure
Construction
Project Financing
Economic Risk
Projected Financial Result
Project Debt Financing
Project Equity Financing
Sensitivity Analysis
Subsequent Developments
1
Historical
Background
Historical Background

EUROTUNNEL PROJECT
The Eurotunnel Project
was initiated in 1984.

The rst recorded plans to


construct a twin bore-rail
tunnel that linking United
Kingdom with France.
Historical Background
1973 1974
French President Georges Pompidou and Tunneling began. But when Heaths
British Prime Minister Edward Heath signed a Conservative government was defeated, the
treaty to construct a twin-bore rail tunnel treaty lapsed without ratication by the
under the English Channel. British Parliament tunneling was again
abandoned.

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

The Arranging Banks subsequently teamed up with some of the


largest construction companies in the United Kingdom and France
to form The Channel Tunnel Group Limit ed in the United
Kingdom and France Manche S.A. in France (CTG and FM,
respectively).
CTG-FM was organized as a general partnership to develop what
would become the Eurotunnel System.
Interested parties were invited to submit bids, before the end of
October 1985, for the nancing, construction, and operation of a
xed link across the Channel without recourse to government
funds or guarantees.
Historical Background

In January 1986, the Eurotunnel System was selected as the winning


project.
In February 1986, the British and French governments agreed to grant the
concession to operate the Eurotunnel System (the Concession).
The Concession gave CTG-FM the right to build and operate the
Eurotunnel System for a period of 55 years from the date the treaty was
ratied.
CTG-FM would have the discretion to establish tariffs and to determine its
own operating policies for the Eurotunnel System.
At the end of the Concession, in 2042, ownership of the Eurotunnel
System would revert to the British and French governments.
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The Eurotunnel
System
3
Project Ownership
Structure
Dual-bodied transnational
hybrid

Common shareholders:
Eurotunnel PLC i(United
Kingdom)
Eurotunnel S.A. (France)
Joined together in a general
partnership (hereafter referred to
as Eurotunnel).

Profits and losses will be divided


equally between CTG and FM
4
Construction
Construction
THE CONSTRUCTION CONTRACT
CONSTRUCTION
The construction contract was divided into three principal parts:
Construction was to be carried out by a
Target works.
consortium of construction rms known
The tunnels and underground structures would comprise the
as Transmanche Link.
target works. They would account for about 50 percent of the
contract price. The contractors would be paid for the target
The consortium entered into a single
works on a cost-plus basis providing for a 12 percent prot
general obligation contract to design,
margin.
construct, test, and commission a fully
operational rail system within seven
Insentive:
years of signing the construction
If the actual cost < target cost, Transmanche Link would
contract.
receive 50 percent of the savings;
If the actual cost > target cost, Transmanche Link would
pay 30 percent of the cost overrun (up to a ceiling equal to
6 percent of the target cost).
Construction
THE CONSTRUCTION CONTRACT (CONT.)

The lump-sum works.


The terminals, the xed equipment, and the mechanical and electrical elements of the Eurotunnel System would
comprise the lump-sum works.

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.

The procurement items.


These items consisted of the locomotives and the shuttles. Transmanche Link would subcontract for these items.
Eurotunnel would pay the subcontracted bid price directly to the subcontractors. Transmanche Link would
oversee the bidding and supervise the subcontractors.

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:

Table 18.1 provides a detailed cost


breakdown. To meet these costs and cover
possible cost overruns, Eurotunnel planned
to raise 6.0 billion:
Raise of Fund
Eurotunnel planned to raise the funds in stages:
1. Prior to the Eurotunnel Projects selection by the British and French governments, the Arranging Banks
obtained strongly worded letters of intent from 33 banks to underwrite loans of approximately 4.3billion.
2. Following the Eurotunnel Projects selection, the founding shareholders contributed equity of 50 million
to CTG-FM (which constituted Equity Offering I).
3. The Arranging Banks then worked to increase the size of the underwriting syndicate to 40 banks in the
spring of 1986 and to formalize their lending obligations in a collective binding commitment to underwrite a
5 billion syndicated loan. The Arranging Banks planned to complete syndication after the construction
contract had been signed and a further equity offering (Equity Offering II) had been completed.
4. Eurotunnel planned a second issue of shares (Equity Offering II) in June 1986. Eurotunnel hoped the issue
would raise an additional 150250 million.
5. The Arranging Banks would then syndicate the 5 billion project loan and enter into the underwriting
agreement. Drawdowns would not be permitted until a total of 1 billion of equity had been raised and at
least 700 million of it had been invested in the Eurotunnel Project.
6. A third equity offering, Equity Offering III, would raise the balance of the 1 billion of equity.
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Economic
Risk
Economic Risk

Eurotunnel is expected to have a competitive advantages over existing cross channel


transportation.
Economic Risk

Eurotunnel commisioned various marketing studies. Marketing consultants :


Reviewed past trends in passanger and freight traffic by sea and passanger traffic by air
between UK and mainland Europe.
Asessed the likely total traffics flow in 1993 and thereafter.
Estimated the Eurotunnels share of this future maket (diverted traffic)
Prepared a forecast of the incremental traffic to which thr Eurotunnel System was likely to
give rise (created traffic)
Estimates the revenue of Eurotunnel System
Economic Risk (Assumptions)

High speed rail service would be available between London and both
Paris and Brussels.

Eurotunnel would be permitted operate its facility duty-free


throughout the concession period
Economic Risk
Economic Risk
Economic Risk (Other Analysis)
Economic Risk (Other Analysis)
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Projected Financial
Result
Projected Financial Result
Key Assumptions

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

Eurotunnel System would open in May 1993 (fully operational)


All profits available for distribution each year would be distributed as dividends to shareholders.
The sterlingfranc exchange rate would remain constant at 1:FF10 throughout the entire period.
The rates of inflation in revenues, overhead, operating costs, and capital expenditures would be identical
each year. The specific annual inflation rates assumed in preparing the projections were: 4.0 percent in
1987; 4.5 percent in 1988; 5.0 percent in 1989; 5.5 percent in 1990; and 6.0 percent in 1991 and thereafter.
The interest rate on cash balances would be a constant 8.5 percent
CTG andFM would share all revenues and costs (other than depreciation and taxes) equally
The travel privileges granted subscribers to Equity Offering III (discussed below) would not materially
affect the Eurotunnel Systems revenues, operating costs, or tax liabilities.
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Projected Debt
Financing
In February 1986, National Westminster Bank, Midland Bank, Banque Indosuez, Banque Nationale de Paris, and
Credit Lyonnais were attempting to syndicate the 5.0 billion project loan (the Project Loan Facility) for the
Eurotunnel Project among approximately 40 second-tier underwriting banks.

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

The treaty between the United Kingdom


and France was ratified, and the
Concession came into force in July 1987.
Later that month, the underwriting of
the 5.0 billion Project Loan Facility was
finalized. The Project Loan Facility was
syndicated in September 1987 among
130 banks worldwide.
9
Project Equity
Financing
Project Equity Financing

The syndication of the 5.0 billion Project Loan


Facility was completed in September 1987. But
the stock market crash of October 1987 had
introduced a new element of uncertainty.
Equity Offering III consisted of an initial public
offering of the Units. Each Unit included a
single share of EPLC (the U.K. company), a
single share of ESA (the French company), and
one detachable warrant. The Units would trade
in the public equity markets in London and
Paris. Equity Offering III was intended to raise
770 million of equity to bring the total equity
raised for the Eurotunnel Project to 1.023
billion.
Project Equity Financing

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.
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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.
Thank you

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