UK: Doom and gloom in the Tunnel - EUROTUNNEL.

UK: Doom and gloom in the Tunnel - EUROTUNNEL. - It was just one more watershed episode in the turbulent history of Europe's largest-ever private sector construction project, but it vividly illustrates the sense of high drama and knife-edge risk that has

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Last Updated: 31 Aug 2010

It was just one more watershed episode in the turbulent history of Europe's largest-ever private sector construction project, but it vividly illustrates the sense of high drama and knife-edge risk that has continuously attended the enterprise as the engineers inched across the seabed and the managers edged their way along an ever-crumbling financial precipice.

By Tuesday, 20 February 1990 the cost of building and fitting out the Channel Tunnel, initially set at £4.87 billion, had already risen to an estimated £7 billion, and the money was within hours of running out.

The deadline for signing a vital new compromise agreement with Transmanche Link (TML), the consortium carrying out the actual tunnelling, had come and gone 24 hours earlier. Without it, Eurotunnel's four Agent Banks - Banque National de Paris, Credit Lyonnais, Midland and NatWest - refused to release urgently needed funds. "Throughout that previous week we had been approving invoices for payment one by one, but were down to our last million," recalls Graham Corbett, Eurotunnel's managing director in charge of finance. "For a company our size that's as near as you can get to bust."

By mid-afternoon, Andre Benard and Sir Alastair Morton, respectively that beleaguered company's chairman and managing director, were looking at disaster. When the phone rang at 5pm and TML finally broke its silence to re-open negotiations, they were busy scheduling an emergency board meeting (8,30am, Le Bourget airport, outside Paris) with liquidation at the top of the agenda.

Working under water always seems to worry investors. Eurotunnel people grimly recall that the great Victorian engineers, Isambard Kingdom Brunel, was consigned to debtor's prison at one point while he was digging the first Thames railway tunnel. So they remain disappointed, rather than surprised, when their backers retreat into pessimistic gloom.

But even they were admitting, in 1990, that there was plenty to be gloomy about. Delays, accidents, quarrels with the contractors, cold feet by the British government over funding a high-speed rail link, all generated dismal headlines and adverse comment, and caused further concern among the 132 banks involved. Under the terms of the original £5-billion syndication, put together in 1987, they could block all drawings "until the project was fully funded" and the dramatic rise in estimated costs had put that target far out of reach.

In the words of Pierre Coindreau, a former engineer now working for BNP: "The slow start-up of the tunnelling work and the engineering problems of large rolling stock travelling at high-speed both caused significant overruns. It is not unusual in project financings to have cost increases, but what became clear was that if the banks had known that Eurotunnel's costs would rise by 40%, they would never have backed it in 1987".

Three years later, when the world had moved from boom to recession and almost every bank was under heavy balance sheet pressure, the task of persuading them to part with an extra £2 billion could easily have been insuperable. Just opening up the 1987 package, with six different tranches of capital and its complex mix of currencies, loans and letters of credit, was a major technical exercise, made even more difficult by the fact that many of the original participants were now pleading acute poverty.

In the end it took eight months of nail-biting persuasion. First a new agreement had to be hammered out with TML, under which the contractors, in an unprecedented concession, accepted that they themselves would bear a share of future escalations.

Then the public shareholders, who had seen their equity virtually vanish at the time of the January crisis, had to be cajoled into subscribing to a £500 million rights issue - backed by a unique standby underwriting arrangement - something which the bankers insisted on before they would finalise any further moves. And only after that could the serious horse-trading start.

The final result involved a scaling down from £2 billion to £1.8 billion (with the shortfall made good by a £300-million, 25-year loan from the European Investment Bank) and a fairly onerous tightening of the terms.

Most of the extra funding would carry an interest rate 0.25% higher than the original £5 billion. There would also be a participation fee of 1%, and increased utilisation and commitment fees on all amounts above £4 billion (which was necessary just to win agreement to extend financing of any kind beyond May 1990) and, as one more ticking time bomb, a "penal" extra margin to be imposed if it became necessary to draw the last £700 million.

At the time, the Eurotunnel teams were confident that would never be required, but once again their optimism has been confounded. In 1992 the cost estimates have soared yet again, to well over £8 billion, the projected opening date has slipped by several months, TML is claiming £1.5 billion in unpaid penalties, the banks are threatening to withdraw support unless the dispute is comprehensively settled and at least one of the main contractors, Martin Bougyes, has been openly talking about Eurotunnel going bankrupt.

The analysts at Warburg Securities must be looking back wryly at the contents of their 1987 circular, which ringingly announced: "We believe the balance of probabilities is that Eurotunnel will be completed both on time - May 1993 - and to budget."

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