Eurotunnel has been locked in restructuring talks with its creditors over the past few months, trying to reach a compromise solution that is acceptable to its various creditors. On Aug. 2, the Paris courts placed the company on safeguard proceedings, similar to U.S. Chapter 11. In France, these safeguard proceedings are intended to help distressed businesses rehabilitate themselves before their financial difficulties become irreversible.

"At the 11th hour, Eurotunnel presented a compromise solution which maintained the framework of the plan agreed with senior creditors but also tried to appease junior debt holders, however this proposal was rejected," Dresdner Kleinwort Wasserstein explained. "Once the company enters bankruptcy protection, the restructuring talks will resume but within the boundaries defined by the French courts."

Recovery prospects

The proceedings will, for the first time, test the recovery prospects under the French insolvency law that came into effect in early 2006. The safeguard proceedings are expected to move relatively quickly but Standard & Poor's remains concerned that the new law will not be capital market creditor friendly. "Their outcome will depend on the strength of the restructuring proposal and the willingness of the court to support the plan," S&P analysts said. "The larger lesson to be drawn, however, is the relative uncertainty facing capital-market lenders under the French insolvency regime."

Under the new insolvency law, capital market creditors have limited power to negotiate more favorable treatment, unlike bank lenders and trade creditors. Capital market creditors only have the right to be consulted in the planned negotiations but have few opportunities to influence the process and protect their interests. S&P noted that while capital market creditors cannot block reorganization plans - because Eurotunnel plans to continue to do business and to depend on the willingness of lenders to extend future credit - capital market lenders could influence the company to consider their interests on this basis. "Eurotunnel's most senior creditors might emerge with relatively high recoveries, while junior lenders may be forced to play their traditional role of fall guys," S&P said. "The key issue is what leverage junior lenders have to make management, senior creditors and, if necessary, the Commercial Court, see things their way."

Under the new law, the senior lenders' substitution right, which typically allows the banks to take over the concession and run the tunnel themselves, remains exercisable during the safeguard period, while legal actions, security enforcement, and contract termination are frozen.

Rating agency response

Standard & Poor's has already responded by cutting the ratings of Eurotunnel's debt and its Fixed Link Finance (FLF) transactions. The senior secured bank loan rating has been downgraded to C' from BBB' and the classes A, B and C of FLF 1 have all been cut to C' from BB-', CCC+' and CCC-'respectively. The MBIA-wrapped tranches in both transactions have been affirmed at AAA.' But analysts at Dresdner said that these tranches have already experienced significant spread widening as the risk that MBIA could exercise its par call is priced in. "There is an explicit par call in FLF 2, and the wrapped AAA' tranche has been trading recently with a cash premium of more than eight points to par," reported analysts. "There is not an explicit call in FLF 1, however MBIA is only obliged to repay par in the event of a default or acceleration. The market in the unwrapped tranches has also come off significantly."

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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