Pity the Eurotunnel shareholder. Since January 1994, the company's stock has plunged 60%, closing at 157 pence Aug. 23.
Now, it's becoming increasingly apparent Eurotunnel management will have to restructure its debt. Outsiders say the operator of the Channel tunnel needs to convert (pounds) 3 billion ($4.62 billion) of its (pounds) 7.8 billion ($12 billion) bank debt to equity, further diluting ownership for its long-suffering shareholders. Meanwhile, talks with Eurotunnel PLC's consortium of 225 lenders on permitting the company to draw down the remaining (pounds) 393 million of a (pounds) 693 million senior debt facility were set to begin shortly.
To rub salt into the wound, French regulators are investigating possible insider trading activities involving two of Eurotunnel's investment bankers, Salomon Brothers International Ltd. and Swiss Bank Corp. Both firms vigorously deny any wrongdoing.
"In one respect, investing in Eurotunnel has been as disastrous as the Panama Canal venture. It has made bankers rich and happy while shareholders got to foot all the liabilities," said Christian Cambier, founder of the Paris money management firm Prigest who in 1992 set up the Association for Eurotunnel Shareholders, a group representing individual French shareholders.
Shareholders in the Anglo-French concern have lots to gripe about. When the company issued a rights offering in late May 1994, it projected 1995 revenue of (pounds) 525 million. But problems in receiving rolling stock have upset projections. Second-quarter revenue hit only (pounds) 60.3 million, far short of the company's (pounds) 180 million quarterly interest payment. First half revenue was a measly (pounds) 104.5 million.
Meanwhile, Klesch & Co., a London firm specializing in trading distressed debt, recently issued a report saying the Eurotunnel will be unable to pay back interest and principal on its loans and urging that its debt load be reduced.
After Mr. Cambier said last month the company could face an 8 billion French franc (1 billion) loss this year, the stock plunged 3.5%, closing at 13.60 francs (171 pence). A week later, on Aug. 22, the stock plunged 17% to 138 pence, but since has bounced back to 157 pence. (The stock is traded in both London and Paris.)
The company's two biggest institutional shareholders have refrained from critical comment on the subject. Capital Group Inc., Los Angeles, recently lowered its holdings in the troubled company to 9.03% from 10.05%. "We are not discussing our investments as a matter of policy," said John Lorenz, a company spokesman.
Bombardier Inc., Montreal, the rolling shuttle and train manufacturer that was paid in shares, has decided to hold on, even though its shares were valued at 38 francs when issued.
"We have lost a lot of money already. But we are confident that things will get better and we trust our shuttles," said a spokesman for Bombardier, which has a 3% stake.
Said Steve Davis, director of the Investor Responsibility Research Center's global shareholders services, Boston: "For foreign investors, Eurotunnel raises essentially management issues. Corporate governance will not have a big payoff in it. Staying in comes down to an investment decision."
British individual shareholders appear unconcerned. That's because most of the shareholders, who purchased shares in 1987 and 1990 public offerings, receive free travel on the train as a part of their share purchase.
French individual shareholders, however, are not complacent. At the company's May 31 annual meeting, some complained that, as owners of bearer shares, they were receiving inadequate information about the company. The company advises against converting the shares to registered form because registered shares are traded on the London exchange only.
Mr. Cambier said management is starting to pay attention to small shareholders.
"At the last annual meeting, I represented close to 8% of the capital. Management started to listen to me," he said.
In particular, minority shareholders have challenged the independence of the company's directors, calling for removal of six directors who are representatives of Eurotunnel's lenders, including Banque Nationale de Paris, Banque Indosuez and National Westminster Bank.
In response, Eurotunnel management promises to appoint a new director to the French board who is close to individual shareholders' interests. Company management also argued bank representatives have financial expertise crucial to the company because of its debt exposure.
The enormous debt burden remains its principal concern.
Marc St. John Webb, an analyst with ING Bourse, Paris, said given Eurotunnel's cash bind, several options are possible. One option is for Eurotunnel's banks to keep lending the company money, possibly rescheduling interest and principal or making loans at a lower interest rate.
He favors converting half of Eurotunnel's debt into convertible bonds with a 2% coupon with a balloon repayment in 15 years that would boost the effective yield to a market level of 8%, similar to how a zero-coupon bond works. That way, shareholders' capital would not be diluted and the company would receive some breathing room.
Eric Michelet, a portfolio manager with Gestion Financiere Privee, added the loans could be rescheduled, with interest and principal payable upon maturity. Alternatively, he suggested additional loans at lower interest rates could be provided.
Experts say a bankruptcy is unlikely, given the political pressures on keeping the prominent project viable.
As if matters weren't bad enough, Salomon Brothers and Swiss Bank are being investigated by the Commission des Operations des Bourses for potential insider trading.
The COB is looking at trading between January 1994 and May 26, 1994, the date of the rights offering. During that time, the stock price plunged to less than 30 francs from 50, while unusual arbitrage took place. For example, a bank might borrow shares for its own account from institutional shareholders and sell them forward at 50 francs. Later, the bank might have bought them back at 30 francs, returning the shares to the institutional shareholders.
Swiss Bank officials deny there was any improper conduct. In a release, the bank said it is "entirely satisfied that it acted at all times in accordance with all regulations and with the highest professional standards."
Similarly, Salomon officials said the allegations are "totally unfounded" and noted the investigation has not been completed.
In addition to pursuing civil sanctions, COB officials also have referred the matter to a public prosecutor, who might pursue a criminal inquiry. If so, Eurotunnel officials say they may bring suit against its bankers on behalf of its shareholders.
