Twenty years after the Channel Tunnel project started, there are now arguably more lawyers than train drivers with ‘Eurotunnel’ on their CVs.
The last creditors, Oaktree and Franklin, finally approved the company’s rescue plan two weeks ago after years of high drama. But why were the celebrations and fanfare absent from the end of the century’s toughest restructuring. Was everyone just too tired?Andrew Wilkinson, managing partner at Cadwalader Wickersham & Taft in London and lead partner for main creditor MBIA, says: “Overall I think Eurotunnel is the most complicated restructuring ever done in Europe.
“It’s down to the complexity of the debt, the involvement of governments and the jurisdictional issues.
“If you sat down and tried to write a case study about jurisdictional conflicts for a law student, you’d never come up with anything as Byzantine.”
Eurotunnel’s problems started before construction work had even begun because of a simple miscalculation of supply and demand.
Wilkinson says: “Eurotunnel got into a mess for three reasons: the traffic projections were massively overoptimistic, the construction costs were underestimated and the fire in the tunnel got things off to a bad start.”
The tunnel itself cost nearly six times more than expected to build, coming in at a hefty £10bn. Eurotunnel found itself with a profit too low to even pay off the interest. What followed was an attempt to break up the debt in 1998, which was hampered by the commercial banks’ refusal to write off the debt. The resulting complex system of layered debt would become a headache for lawyers further down the line.
Years of corporate underperformance and rigid debt obligations led to growing shareholder dissatisfaction. A shareholder coup in 2004 installed Jacques Gounon as chief executive officer and kickstarted the second attempt to get a hold on the company’s debt, which would eventually cut that debt down from £6.2bn to £2.1bn.
Despite this defining moment, not much actually happened for around 18 months.
Much of 2005 was taken up with tentative attempts at putting together a variety of schemes, while the creditors organised themselves into a committee.
Wilkinson says: “2005 consisted of preliminary skirmishing, drafting business plans and exchanging ideas.”
The turning point came when the company finally drew up the foundation for its debt reduction plan in January 2006, then known as the ‘PRA Termsheet’.
The senior creditors approved the scheme after some tough negotiations with Eurotunnel’s new team from Freshfields Bruckhaus Deringer, led by capital markets star Patrick Bonvarlet.
Wilkinson says: “Freshfields really got into the room in May 2006. Up until that point the company was looking to us to lead on technical issues, which was an awkward position.
“Patrick [Bonvarlet] is certainly a tough negotiator. It was heavy lifting, but we got there in the end. They were probably the hardest round of negotiations I’ve ever had.”
But Bonvarlet could not get the junior creditors to sign up.
Eurotunnel’s Gounon went to the courts to start a safeguard procedure that had never been tried before to keep the plan alive.
This made it more difficult for the junior creditors to challenge the plan and get more money out of the restructuring.
“I think from the company’s point of view it was a brilliant move. It enabled the majority of senior creditors to bind the minority in Tier 3 debt,” says Wilkinson.
The courts, which did not want the new safeguard procedure to lose face, resisted the challenges and eventually the junior creditors signed up in December.
One final twist saw senior creditors Oaktree and Franklin split from the committee and reject the safeguard plan, only to agree to it in mid-January.
Now the company is in a position to get back on track in 2007.
Lyndon Norley, Europe head of restructuring at Kirkland & Ellis and adviser to creditor European Investment Bank, says: “The plan needs to be implemented and that can take some weeks. But I think, come another three to four months, the whole process should be over.”
But no one sounds particularly happy about this yet. Before the backslapping can get underway, Eurotunnel has to jump its last hurdle – the shareholders.
Eurotunnel needs a majority vote from the shareholders (more than 70 per cent of which are individual retail investors) in favour of the plan to implement it.
Norley says: “There’s a huge amount of potential for equity dilution in the scheme. It could be difficult to get the shareholders on board.”
Wilkinson disagrees, arguing that the shareholders have little choice. “I think people will be very surprised if the shareholders turn it down. If they do the company will go bust,” he says.
One of the other factors to explain the lack of joy at the end of the process is that all the parties involved have less money than they started with. The only ones to have made real money on Eurotunnel are the advisers.
“Like many negotiations I guess everyone felt equally unhappy,” says Norley. “It ended on a whimper really, rather than with a ‘Hey! Fantastic!’ It’s quite odd.”
If there is a winner to come out of the bloody battle, then it is the French legal regime and market, which has been shaped into one of the finest in Europe for restructuring.
“I think that Eurotunnel will increase the restructuring expertise in France. There are more people now that have expertise in restructuring and France has shown itself to be a jurisdiction that can get restructuring done,” says Wilkinson. “Every lawyer in town would have worked on this in one way or another.”
And that means every lawyer in town is likely to be too drained to feel relief.
Eurotunnel may well be one of the most groundbreaking restructuring deals ever, but in a sense it cannot set a precedent since the circumstances will not be repeated again.
Wilkinson says: “I think Eurotunnel is quite unique. It’s horrendously complicated. You can’t learn general lessons from it.”
UK and French governments agree to create a ‘Fixed Link’ between the two countries.
Eurotunnel selected from a shortlist of four Fixed Link projects.
First tunnelling breakthrough, 22km from UK, 15.6km from France.
Eurostar opens routes.
Eurotunnel and commercial banks construct a plan to restructure the company’s debt, leaving half of it locked up in a complex system of subordination.
New Eurotunnel board brings in Weil Gotshal & Manges to restructure the debt, leaving Herbert Smith in a corporate role. Board also ditches Clifford Chance clients Merrill Lynch and Dresdner Kleinwort Wasserstein as financial advisers.
Eurotunnel instructs Freshfields Bruckhaus Deringer to lead on debt restructuring.
Main creditors approve Eurotunnel’s restructuring deal, slashing its debt from £6.2bn to £2.1bn.
Courts and breakaway creditors Oaktree and Franklin approve the deal.
EUROTUNNEL WHO’S WHO
Weil Gotshal & Manges – UK and US aspects of restructuring.
Herbert Smith – restructuring and corporate.
Freshfields Bruckhaus Deringer – French and UK restructuring.
Veil Jourde – French administration proceedings.
Clifford Chance – Goldman Sachs.
Sullivan & Cromwell – Macquarie Bank.
Linklaters – creditors committee.
Kirkland & Ellis – European Investment Bank.
Cadwalader Wickersham & Taft – MBIA.
Debevoise & Plimpton – Oaktree.
White & Case – smaller debt providers.
Allen & Overy – junior debt holders.