OUTLOOK: Even the French will say `non' to Eurotunnel

THREE THINGS are certain in life. Death and taxes are two of them, but a third is that Eurotunnel will never be far away from its next financial crisis. It took two rescues on top of the initial round of bank and equity finance even to see the Channel Tunnel through to its completion, yet that too proved insufficient to put the company on a sound financial footing.

Eurotunnel was insolvent virtually from the day it began operating and in the subsequent refinancing the original share investors were all but diluted out of existence. Now there is a whole new generation of them like lambs to the slaughter nervously awaiting their fate. It's hard to see what might save them.

Despite all the past refinancings, the tunnel is still saddled with pounds 6.4bn of debt and too few users to pay its way. Yesterday's reported pounds 1.3bn loss was mainly down to asset impairment charges, but even at the operating level, the company continues to lose money and once you factor in interest on Eurotunnel's still mountainous debt pile, which becomes payable again soon under the terms of the last refinancing, Eurotunnel is losing money hand over fist. Revenues are flat, with little sign of improvement. Once current capacity usage agreements with the railways come to an end, they'll be lower still.

When all else fails, go cap in hand to the Government. Absolutely not, says the British government, which points out that under the terms of the Channel Tunnel Treaty, it is in any case specifically banned from offering aid .

Oh go on, says Eurotunnel. One way would be to underwrite an issue of bonds, in much the same way that John Prescott did when he came to the rescue of the Channel Tunnel Rail Link. Another would be to allow Eurostar and SNCF, the state sponsored operators of rail services across the channel, to participate in a capitol raising exercise.

In return Eurotunnel would cut usage charges which in time would generate more volume and eventually more revenue too. Even so, it is hard to see why government would want to help by coming to the rescue of distressed debt and equity holders. This is not like British Energy, where the lights might have gone out had not the Government stepped into the breach. Whatever happens, the tunnel is bound to keep operating given that it is already there. Even for the French, whose gut instincts might be to bail out this piece of grand engineering, the benefits of a rescue are far from obvious..

The end game is already all too clear. Debt holders will eventually take- over and appoint new management, obliterating what equity Eurotunnel's (largely French) shareholders have left. Eurotunnel responds that any new management would still be faced with the same old problem of how to make the Channel Tunnel pay, but that obviously depends on how much of a haircut lenders are forced to take. At some level, the tunnel must be viable.

In total, some pounds 25bn has been sunk into getting trains to operate between London, Paris and Brussels. The service works well, providing a much needed alternative to the airlines and ferries, but the one thing no one has yet been able to do is make money out of it. As the Eurotunnel chief executive observed yesterday, the tunnel would never have been built had financiers realised how few people would use it, or how much more than budget it would cost. But there it is, a marvel to behold, and it is the financiers who must bear the cost of their miscalculation.

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