Eurotunnel, the company that operates the Channel Tunnel, recently took its first steps towards a possible securitization of its distressed junior bank debt.

The company mandated Merrill Lynch and Dresdner Kleinwort Benson to tender existing holders of junior debt advances at market prices. The two banks will also arrange any bond issue that takes place.

A Jersey-based special purpose vehicle, called Tunnel Junior Debt Holdings, has been established to buy back the debt, and if a sufficient amount is collected, it will be repackaged in the form of a secured bond and sold to investors. At least GBP1billion ($1.44 billion) will need to be recovered before any issue can take place.

Existing debt holders have until the end of November to accept the terms of the tender, which will take place through a Dutch auction. The offer made by Merrill and Dresdner to French holders of first-tier debt is between 78% and 84% of its nominal value, between 67% and 72.5% for tier two and 54.25% and 59.25% for the third tier.

For sterling debt holders, the offer is in the range of 81% and 87% for the first tier, 69% and 74.5% for second tier and between 56.25% and 61.25% for the third tier.

Peter Kappel, head of European ABS at Dresdner, believes the tender is a good option for junior debt holders in Eurotunnel, given the state of the market. "The purpose for this basically is that the debt is trading at a substantial discount, and there is not much likelihood that existing holders will get bought out or repaid by any other means in the secondary market which is extremely illiquid and not very transparent," he said. "This is designed to forge an exit for those who want to get out at roughly market prices in quantity, and also to create a liquid, tradable piece of paper with Eurotunnel's name on it.

"Basically, what is being done is that there is an offer for tenders outstanding," Kappel continued. "Existing junior debt holders of Eurotunnel can tender according to certain price bands that we've indicated. If we can get enough of it, it will be repackaged as securitized notes and, given the minimum amounts that have been mentioned, we're talking about a GBP1 billion plus."

Kappel said that many debt holders had responded to the initial offer, but that there is a long way to go before a deal is tied up. "It's too early to say. Initially there has been a lot of response and then they have read through the offer and have technical questions," he said. "There are a lot of holders of junior debt who are sitting behind various banks and other participants coming out of the woodwork. Generally, there is a lot of interest in the fact that the process has been initiated. Some very big holders appreciate what it is bringing to the table, although naturally everybody says the price is too low. We'll see how it develops."

Should a bond issue take place, it will be interesting to see how investors view the deal given Eurotunnel's somewhat checkered past, that has seen strikes, rising costs and delays to construction.

"I guess that's one thing we'll find out," said Kappel. "Obviously we've spent a lot of time in structuring this tender and if we get enough acceptances we fully expect to be able to fund this thing, and we're doing so on the basis of a fairly informed view. As for the investors, Eurotunnel is a key piece of infrastructure in Europe, and the company has got enough to pay a certain amount of debt."

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