Eurotunnel may seek bankruptcy protection from a French court through a procedure de sauvegarde which would stall creditors should the company's debt restructuring negotiations reach a stalemate. The waiver permitting negotiations to continue was slated to expire at midnight Wednesday, and under French law, a failure to reach an agreement before the deadline could have led to KPMG, which is the company's auditor, to declare the firm insolvent.

"The safeguard procedure therefore has two purposes: it will act as the threat to encourage creditors to compromise, and it will give the company protection should talks fail," explained Michael Cox at the Royal Bank of Scotland. "It is quite possible that an agreement could be reached today, in which case Eurotunnel will likely withdraw its request. If not, it is also possible that the court could appoint an official to mediate in the talks, and an agreement could still be reached. The eventual outcome is difficult to call."

CEO Jacques Gounon has stated that the filing would be withdrawn if an accord with creditors were reached by midnight.

The ARCO group, representing junior debt holders, rejected the restructuring plan agreed to by the company with senior creditors last May. It has also attempted to push through an alternative debt-restructuring plan with the help of Deutsche Bank, which has, in turn, been rejected by Eurotunnel.

Cox said that if an agreement is reached between the company and its creditors, it is unlikely that MBIA, which backs the notes under the company's whole business transactions, would seek to redeem the wrap on the notes under Fixed-Link Finance 1 and 2 at par value as long as payments are being made on the underlying bonds. Traders at Dresdner Kleinwort Wasserstein said that trading on these transactions was extremely thin last week as market participants waited for the outcome of the discussions.

"Even in a situation where payments were suspended (on Fixed-Link Finance 2 notes, which do not benefit from liquidity, for example), we expect that MBIA would simply continue to make scheduled payments at least until the outcome is known," Cox said. "Only in a situation where there was a complete overhaul of Eurotunnel's finances and repayment or write-off of relevant classes of debt (Tier 1, 2 and 3 in the case of Fixed-Link Finance, Tier 1A in the case of Fixed-Link Finance 2) do we see a possibility that notes would be repaid early. Even then, MBIA could still choose to make scheduled payments rather than pay out in cash early."

Fixed-Link Finance 2 is backed by long-term debt. This is why early repayment would be unnecessary and unlikely in a restructuring. "For unwrapped notes, the theoretical position in Fixed-Link Finance is that payments would continue to be made using reserves and liquidity, but the possibility of early repayment and/or write off of the debt forming collateral for the vehicle could trigger a restructuring of Fixed-Link Finance itself," Cox explained. "For Fixed- Link Finance 2, the underlying collateral is Tier 1A, a direct obligation of Eurotunnel. Tier 1A is relatively senior in the capital structure and therefore unlikely to suffer an ultimate loss; however, for unwrapped bonds, the possibility that payments could be suspended during the negotiations remains."

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

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