dnEurotunnel moved ahead with its slated restructuring plan. Last week the company's bank creditors voted to write off a significant amount of debt under the French procedure de sauvegarde (safeguard procedure). The restructuring reduces the company's debt to GBP2.8 billion ($5.5 billion) from GBP6.2 billion.

Under the plan, the most senior GBP2.53 billion of the company's GBP6.18 billion debt will be transferred at its present value to a new company. The remaining, lower-ranked GBP3.66 billion will be offered as either GBP240 million cash or stakes in a GBP1.17 billion hybrid bond that will transform into 87% of new Eurotunnel's shares. Consent from bondholders and shareholders is now required, and the bondholders' vote will take place in the next week or so. There will be no separate shareholder vote.

"The court can impose the restructuring plan even if bondholders reject it; however, the law involved is new and without existing precedent," Sarah Barton, an analyst at Morgan Stanley, said. "If the proposal fails, Eurotunnel will become insolvent in January 2007."

According to Fitch Ratings, it's unlikely that Eurotunnel will make interest payments on Eurotunnel's debt, which forms the collateral for the Fixed Link Finance (FLF) securitization deals 1 and 2, due in January and February 2007. This is expected to constitute an event of default under FLF2's documentation. However, under the French safeguard procedure, Eurotunnel is protected from paying interest payments until a restructuring plan is implemented.

Timing for refi

The earliest expected timing for the refinancing to be implemented is sometime after the end of March 2007. Fitch analysts said that FLF1 appears to have sufficient forms of liquidity to pay its class A, B and C bonds interest payments over the short term.

"If the restructuring plan is approved FLF1 expects to receive cash for the debt," Morgan Stanley's Barton explained. "If no agreement is reached, various eventualities are possible. However, if the MBIA guaranteed bonds default, MBIA will step in to make debt service payments on the wrapped debt."

Eurotunnel disclosed that Tier 1A (FLF2's collateral) principal plus accrued interest - including unpaid but not default interest - is expected to be repaid from proceeds of a new term loan when the plan is implemented. FLF2 does not benefit from a liquidity or reserve fund. It comprises the Eurotunnel Tier 1A Loan, which, under the announced safeguard plan, is expected to default in January 2007.

"This Eurotunnel default will leave FLF2 with insufficient liquidity to meet its' February 2007 interest obligation, causing an FLF2 event of default under FLF2's documentation," Barton reported. "Under the terms of its financial guarantee, MBIA will step in to make debt service payments on the wrapped FLF2 debt." She added that it is also worth noting that such an FLF2 default gives MBIA an unfettered right to accelerate the FLF2 guaranteed notes. However, the wrap provider has not yet announced its plans regarding this acceleration option.

Fitch said that the ratings of FLF1 are unaffected by the expected interest shortfalls in January 2007 as this vehicle has sufficient forms of liquidity to pay its Class A, B and C bonds' interest payments over the short term. The ratings of FLF2 unwrapped debt tranche has been downgraded to B-' from B'. Its recovery rating is affirmed at RR1', denoting "outstanding recovery prospects given default," said the rating agency. Its guaranteed notes are affirmed at AAA'.

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

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