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RESTRUCTURATION ET ABUS DE MARCHE
NEGOCIATION ET INFORMATION
FINANCIERE
The Advertiser
Chunnel starts to sink
By Robert Clow
20feb06
UNDAUNTED by its faltering bid for the London Stock Exchange, Macquarie Bank may
be preparing a new assault on Fortress Europe.
Last year US hedge fund Camulus, a spin-off of Soros Funds Management,
approached Macquarie with the idea of bidding for the Channel Tunnel. The fund
is one of Eurotunnel's creditors and was looking for a fail-safe position if
creditor talks failed.
Macquarie's initial reaction was very positive, according to someone with
knowledge of the talks. But any such bid would be enormously challenging. The
deal would be huge, even by Macquarie's increasingly immodest standards.
Eurotunnel has a market capitalisation of $1.9 billion, but it also carries a
debt mountain with a nominal value of about $15 billion. Furthermore, buying
Eurotunnel would require Macquarie to gain the approval not only of fellow
creditors, but also of Eurotunnel's militant French shareholders and a
traditionally nationalistic French Government.
But Macquarie Infrastructure Group's successful bid for 70 per cent of
Autoroutes Paris Rhin Rhone shows that the investment bank understands the
political realities of dealing in France. In that case French construction
company Eiffage partnered with MIG, taking just over 50 per cent of the APRR
deal.
At the moment Eurotunnel says its talks with major creditors, which include US
distressed investor Oaktree Capital Management, bond insurer MBIA, the European
Investment Bank and US money manager Franklin Mutual Investors, are on track.
But the creditors have said there was still "much work to be done" on the
agreement and credit rating agency Standard & Poor's remains sceptical that any
agreement can be reached.
At the weekend Eurotunnel said its auditors KPMG and Mazars et Guerard had
initiated "the first stage of the (insolvency) process of issuing a warning
regarding Eurotunnel's viability as a going concern".
Eurotunnel has said that it needs to reduce its debt by almost E6 billion ($9.6
billion) to be viable. It is not clear whether the tunnel owner's position has
softened during the talks. If the talks fail, Eurotunnel has said it would be
unable to make payments in 2007 and, subject to the approval of the UK and
French Governments, creditors could then step in to take ownership of the
tunnel. Macquarie could theoretically step in at that stage, if it could present
the most attractive debt/equity package to the stakeholders.
Many of Eurotunnel's debts were sold by its original lender banks to hedge funds
and other investors midway through last year. Distressed debt investors
typically buy bonds in troubled companies for a fraction of their nominal value,
so even a very substantial debt reduction could yield them a profit. Camulus
inherited the Channel Tunnel debt position from the Soros group when the
distressed debt group went its own way.
Soros has always seen its interests as distinct from the major creditor group,
which holds a different class of Eurotunnel debt. Last year the fund management
group attempted to set up a second creditors group. Debt investors tend to act
in concert, so it would be entirely logical if Camulus represented other
like-minded creditors in the Macquarie talks.
The Channel Tunnel has probably been the most disastrous investment in the
history of privately funded infrastructure.
Since UK prime minister Margaret Thatcher and French president Francois
Mitterand initiated the project in the mid-80s it has been bedevilled by cost
overruns and wildly over-optimistic traffic forecasts. Eurotunnel shares have
collapsed twice and the debt has already been refinanced once.
But Macquarie might be willing to take on the mature tunnel now that investors
have some idea of what kind of traffic to expect. Last year the 50km tunnel
carried 7.5 million passengers and generated revenue of £541 million. Regardless
of whether a deal does eventuate, Camulus's approach is an indication of
Macquarie's increasingly tight relationship with the $US1 trillion ($1.35
trillion) global hedge fund industry.
Macquarie recently teamed up with another hedge fund, Cerberus, to bid for
Morgan Stanley's AWAS aircraft leasing subsidiary, and two hedge funds are part
of the consortium backing Macquarie's London Stock Exchange bid.
It seems that Macquarie's breed of aggressive, opportunistic capitalism has
struck a chord with the buccaneering hedge fund community.
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