Eurotunnel instructs Herbert Smith for debt repackaging

Herbert Smith has rekindled its relationship with Eurotunnel, acting for the longstanding client on a massive debt repackaging.

The firm, which has not closed a major deal for the client for about a year, worked alongside four other City practices to complete the innovative £1bn repackaging programme.

The cast on the deal included teams from magic circle giants Clifford Chance and Linklaters & Alliance, and the London offices of US firms Sidley & Austin and Cadwalader Wickersham & Taft.

Herbert Smith was last instructed by Eurotunnel for such a high-profile deal in late 1999, when it acted on debt purchases and a £165m rights issue. Earlier in the year, the firm had advised the group on two other big debt purchase and redemption transactions.

Clifford Chance was in the lineup for an aborted Eurotunnel deal three years ago and was called in for this transaction by lead manager Dresdner Kleinwort Benson, now Dresdner Kleinwort Wasserstein, which acted on both.

This deal was one of the most complex of its kind. It started with the acquisition of the junior bank debt participations under a tender offer by an independent company, Tunnel Junior Debt Holdings, and then their sale to another independent company, Fixed-Link Finance (FLF). FLF funded its acquisitions with the issue of £432m and euro745m (£473.3m) bonds in the international capital markets.

The Herbert Smith team was led by banking partner Gary Hommel, who has worked on previous Eurotunnel deals as an assistant. He made partner last year.

Hommel says: “This deal presented enormous challenges. At least 12 months ago we were called in to conduct feasibility studies as to whether this was possible. It had to be tailored to Eurotunnel’s complex existing financing arrangements.

“It was very important in structuring it to make sure that European banks were comfortable with it, and then the transaction really got going last summer fairly intensively.”

Other partners in the team included corporate partner Ben Ward, US securities partner Allen Hanen, tax partner David Martin and banking partner James Slessenger. Ward and Slessenger both have longstanding relationships with Eurotunnel, Slessenger having acted for it for more than 10 years.

A Clifford Chance team, led by banking partner Peter Taylor, represented the deal managers and lead managers to FLF’s bond issue, Dresdner Kleinwort Wasserstein and Merrill Lynch International.

Cadwalader partner Andrew Wilkinson represented a group of over 20 junior debt holders in London and the US in early negotiations on the terms and pricing of the invitation to tender. It was once those discussions were finalised that Eurotunnel went on to finance the purchase of the tendered debt by the issue of new rated bonds on the capital markets.

Sidley was instructed by MBIA Assurance, a monoline insurer, to advise on the provision of a financial guarantee of certain tranches of the notes issued by FLF. That allows the classes of the notes benefiting from the guarantee to receive a triple-A rating, lowering the risk for the lenders.

The Sidley team was led by partner Marc Wasserman along with fellow partners Andrew Marsh, Robin Parsons and Drew Scott, all of whom were most heavily involved in the last few weeks of the deal.

Linklaters was involved in the early stages, acting for the lenders to Eurotunnel.

Hommel says the deal is a good one for Eurotunnel, as it will receive the surplus cash generated by the companies which have bought the junior debt when the debt is refinanced. It will also receive additional protection against interest rate increases between 2004 and 2008 on £1.14bn of junior debt. “It’s also a good deal for the lenders who wanted to participate, because they’ve been able to sell their Eurotunnel debt if they wanted to or they’ve been able to buy the notes from FLF, which are rated and more secure,” he says.

Herbert Smith advised on US, UK and French law, and Clifford Chance covered the multi-jurisdictional elements of the transaction.

Taylor led a team that included: banking and finance partners Rachel Kelly and Susan Rose, who represented the trustee, Citibank; US securities partner Robert Trefny; tax partner Michael Wistow; Dutch tax partner Frank de Vos; New York-based securities partner Richard Kosnik; and Paris banking and finance partner Michael Elland-Goldsmith.

Taylor says: “We were appointed by Dresdner Kleinwort Wasserstein back in March last year when they were the sole arranger. They brought in Merrill Lynch at a later date – they felt it was such a major deal that they thought they should have two lead arrangers.

“The transaction was extremely complicated, extremely large and very high profile. It was a very good transaction for us, involving our Dutch, New York, Paris and London offices. We didn’t pitch for it because we’d worked with Dresdner before on a Eurotunnel deal, which didn’t actually come off.

“One of the principal things on this deal was to know the underlying debt structure of Eurotunnel.”

Herbert Smith has acted for the client since the inception of the tunnel back in 1985, and deals have been done for them in both the financing and non-financing arenas. Since the rights issue, the firm has advised on a programme for early conversion of its equity notes, refinancing of its senior debt and day-to-day facility management issues.