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VIE DES AFFAIRES ANALYSIS OF THE CONTRACTUAL PROVISIONS AS TO RESTRUCTURING
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Role of the Ad-hoc Committee An Ad-hoc committee representing a number of the principal creditors was formed during 2004 – the purpose being to represent the views of the constituents creditors and thereby improve the efficiency and effectiveness of the negotiating process. The committee consists of representatives from the EIB, Franklin Mutual Advisers LLC., MBIA and Oaktree Capital Management. Combined they represent 69% of Eurotunnel’s Co-Financier1 debt. There will also be other committees for groups of creditors, but the Ad-hoc committee is currently important in that it spans different tiers of debt and, with MBIA on it, has a significant approximately 50% Junior debt representation. members. Who is Required to Agree a Restructuring? The terms of the Eurotunnel debt lay down who is required to approve any restructuring plans. The following are the constituents who are required to agree to the restructuring: 1 Co-Financiers refers to Junior debt creditors, EIB and ECSC as the Fourth Tranche, and for voting purposes can include enfranchised Stabilisation Advan1. 85% of the lenders participating in the Junior and the Fourth Tranche debt; as well as 2. to the extent the restructuring involves waivers or amendments to the underlying debt of any of the following creditors then they are required to vote as effected parties requiring: • 75% of Senior debt holders, to the extent that they are affected by the proposals, with 100% required if the changes affect the economic terms of their position;• 100% of each of the Junior debt holders (Tier 1, Tier 1A, Tier 2 and Tier 3 debt) – requires unanimous agreement from all Junior debt holders affected by the proposals;• Resettable Facility Banks – requires at least 75% of those who vote within a specified period;• Stabilisation Facility Banks - requires at least 75% of those who vote within a specified period; and• approval from European Investment Bank (“EIB”) and European Coal and Steel Community (“ECSC”) – is required separately if the proposed restructuring plan affects the maturity, repayment profile or other financial terms of the Fourth Tranche debt.To the extent that shareholders of Eurotunnel are affected, i.e. dilution, a certain minimum percentage of shareholders’ vote (who attend the EGM and then for the vote itself) are required. Given the televised scenes of a riotous AGM in April 2004 when Eurotunnel’s existing management was voted in, the thought of any form of co-operative vote from Eurotunnel shareholders seems a tall order. But if Stabilisation Advances are to be equitised by the end of 2005, shareholders have to agree to this 15% dilution. If their required vote is not secured this subsequent Pyrrhic victory will just complicate the debt restructuring further and various issues will have to be re-visited. If debt restructuring negotiations have progressed, a shareholder meeting by the end of the year may even be informed of prospects of further dilution as further tranches of debt are “equitised”. Main Parties Involved There are a wide range of parties involved in the transaction, all of whom may have differing motivations in the restructuring process. The following are some of the parties likely to be involved: • MBIA – as Controlling Party in FLF1 and FLF2 the monoline insurer will be looking to ensure that the tranches of Eurotunnel debt that are most linked to the resultant FLF1 and FLF2, some of which it guarantees, remain current or less adversely affected within the surviving debt of Eurotunnel;• Hedge Funds – it is widely reported that US hedge funds had been buying the heavily discounted Junior and Infra-Junior2 debt in the market;• Senior debt holders: and• Eurotunnel shareholders – who are unlikely to want their equity to be diluted as further amounts of debt are “equitised”.Voting Rights of FLF Noteholders Underlying Noteholders in both FLF1 and FLF2 will not be entitled to vote on Eurotunnel’s restructuring plan, MBIA as Controlling Party in both transactions holds the voting rights for all the Eurotunnel debt held within the FLF1 and FLF2 transactions. MBIA’s combined vote, representing some 50% of Junior debt, can effectively block a restructuring plan which it dislikes. The timing of the restructuring is now crucial as three key events will become effective over the course of the next 24 months which will have a significant impact upon the ability of Eurotunnel to service its outstanding debt, namely: • December 2005 / January 2006 3: End of the Stabilisation Period and the resulting requirement that all (i) 2006 interest charges on Junior Debt and Resettable Advances are to be met by cash, and (ii) if the Stabilisation Advances are not converted to equity by 31 December 2005 then 2006 interest payments are due on these instrument’s outstandings;• November 2006:End of the fixed income component of the Rail Usage Contract – resulting in reduced revenues for Eurotunnel after this date; 2 ‘Infra-Junior’ is a term used by Fitch to categorise debt subordinated to Junior debt – see p.4 and Appendix 1.3 Two months are given as the payment dates as these are usually something like 25 January or 25 July, but effectively end-December and end-June respectively.• January 2007:Commencement of amortisations for Junior debt (the original Tier1) thus more debt service is required. The year 2007 is quoted as the timeline by which Eurotunnel will be bankrupt if debt renegotiations are not finalised and implemented by then. Current Debt StructureThe below chart illustrates the current composition of the outstanding Eurotunnel debt.1.9 0.9 1.3 0.4 1.8 Eurotunnel Financing Structure As at 31 December 2004 (GBPbn) Source: Eurotunnel Senior Debt Junior Debt Tier 1/1A Junior Debt Tier 2 Junior Debt Tier 3 Infra-Junior Total Debt 6.4 For YE04 oustandings of each tranche of debt, and the holdings of the FLF vehicles, please refer toAppendix 1. The debt structure of Eurotunnel comprises of the Senior debt, Junior debt as well as the Infra-Junior debt. The following is a brief synopsis of the current debt structure, ordered by seniority with amounts as reported as at 31 December 2004:• Senior Debt: Senior debt consists of two senior loans of GBP140m and EUR141m (amortising 2009-2012) as well as the Fourth Tranche which ranks subordinate to the two senior loans. The Fourth Tranche consists of a GBP47m loan from the ECSC with a bullet in 2019 and a EUR120m loan from the EIB amortising 2006-2018.In the FY04 Preliminary Results Presentation management highlighted that, within its current funding agreements, it could raise a GBP50m RCF. This would rank Senior but not have Senior voting powers. It is envisaged that it would be used for “working capital purposes”. At this stage, it is not entirely clear if this suprasenior facility would be employed to effectively pay non-equitised Stabilisation Advances interest payments in 2006, whether as ‘pain’ from Eurotunnel shareholders to its debtholders; or Eurotunnel management fulfilling its obligations to use all means to pay its obligations as and when they fall due; or if debt negotiations are proceeding satisfactorily, an interim measure. Presumably this additional funding would not be used to prop up an insolvent company. • Junior Debt: the Junior debt is tranched into Tiers 1, 2 and 3 in respect of their seniority, with Tier 1 the most senior notes. The interest rate payable on all of the Junior debt is the same independent of each tranche. Tier 1A which wasissued at the time of the restructuring in 2002 ranks pari passu with Tier 1debt; • The Infra-Junior debt consists of: Resettable Advances: Currently there are GBP159m and EUR445m of Resettable Advances outstanding. Interest is set at a fixed rate for periods of between 6 months and 5 years at the discretion of Eurotunnel.The final maturity of the Resettable Advances is 2050 but they must be exchanged into Resettable Bonds at the earlier of (1) the end of the Stabilisation Period, or (2) after three interest payments on the Resettable Advances have been made. Resettable Bonds retain the 2050 maturity date; Stabilisation Advances: GBP178m and EUR271m of Stabilisation Advances outstanding along with GBP78m and EUR118m of Stabilisation Notes. These instruments are paper PIKs for non-cash payment of, mainly, Tier 3 Junior debtinterest (up until 1999 in reality), Resettable Advances, and the Equity notes. A portion of the Stabilisation Advances are expected to be equitised by the end of 2005 (subject to shareholders voting accordingly); and Participating Loan Notes (“PLNs”):GBP424m and EUR639m of outstanding debt, the PLN’s fixed coupon of 1% is Senior in certain cash waterfalls, but the principal is Infra-Junior in certain circumstances. Eurotunnel – Debt Funding Mechanisms Stabilisation Period During the Stabilisation Period, to the extent that there is insufficient cash available to pay interest on Tier 2 & 3 Junior debt and the Resettable Advances, Eurotunnel is entitled to draw on the Stabilisation Facility in order to satisfy those payments – effectively issuing paper instead of interest payments. T1 Stabilisation Advances are for the purposes of meeting Junior debt interest payments, whereas T2 Advances are for the purpose of meeting Resettable interest payments. As at the time of the last restructuring and issuance of FLF2 in 2002, the amount drawn under the stabilisation Facilities stood at GBP126.0m and EUR175.8m. The table on p.13 shows that Junior debt has been current since 2002 but in fact it has been current since 1999; but only periodically, have the Resets received interest (sometimes only in part), thus T2 Stabilisation Advances have been issued. The Stabilisation Period will end on 31 December 2005, after which time: • interest payments will have to be serviced by cash. For the Resettable Advances interest may or may not continue to be current – depending on the underlying profitability and cashflow of Eurotunnel. Assuming that ongoing cashflow replicates FY04’s level, without FY04’s repetition of some GBP14m of restructuring related exceptional costs, the payment in full of Tier 3 interest from operating cashflows may be feasible until the end of the Minimum Usage Charge (“MUC”) and the correspondingreduction in turnover. Despite the MUC effect, conceivably, the December 2006 / January 2007 Junior interest payments could be alleviated by cash within the business as well as the Reserve account /Permitted Float within the group, given the cashflow hierarchy of interest before principal payments • all outstanding Stabilisation Advances may be exchanged for Units, shareholder’s equity, (management projections having shown that these instruments are not going to be paid in cash in 2006 and 2007). In its FY04 Preliminary Results presentation, management has confirmed that it intends to propose that shareholders vote on the (allowable) conversion of these notes to Units – that is Eurotunnel equity – by the end of 2005 – with management suggesting that such a vote would result in a rejection.If this conversion does not take place, probably because existing shareholders refuse to be diluted by some 15%, the advances may be converted (maximum time frame for conversion is 18 months) into Stabilisation Notes which will be due 2018 to 2026. As Stabilisation Advances, ‘Infra-Junior’ in ranking, they will remain as debt under the Credit Agreement, but the holders will become voting Co-Financiers after 18 months only (Co-Financiers consists of Junior debtholders, EIB and ECSC and, after 18 months after the end of the Stabilisation Period, Stabilisation Notes, if not already ‘equitised’). As enfranchised Co-Financier voters their representative percentage vote is around GBP503m (around 11%) relative to the existing senior parties totalling GBP4.1bn. In theory, the interest free period on Stabilisation Advances ends and the coupon changes to the relevant interbank rate plus a margin of 1.25% • the margin on the Resettable Advances steps up from 0.5% to 1.5%. There is a mandatory conversion to Resettable Bonds within 90 days of the end of the Stabilisation Period.Although these events can occur, and there is some “enfranchisement” on Stabilisation Notes potentially becoming Junior debt voteholders, remember that key mechanisms require at least <50% votes, thus a large proportion of Junior debt holders, and MBIA’s significant percentage as a Junior debt holder, will have to want to participate in these newly enfranchised debtholders’ agenda. This is a key consideration in this game of chess. Debt Amortisations During the Stabilisation Period there is no requirement for any principal repayment on any Eurotunnel debt. Commencement of amortisations on various debt instruments is as follows: • Senior Debt – default amortisation schedule commences June 2009;• Fourth Tranche – EIB tranche amortisation commences in 2006. ECSC tranche is a bullet maturity dated 2019;• Junior Debt – required amortisation commences January 2007; Debt amortisations in FY06 total GBP4.1m (mainly related to the Fourth Tranche ).Concerning the Resettables , these can not be normally prepaid whilst any Junior debt, Stabilisation Notes or Stabilisation Advances remain outstanding. Furthermore, it can not be repaid from the proceeds of any refinancing whilst any such debtor any senior advances remain outstanding Alternatives to Restructuring So what would have happened if the restructuring process hadn’t begun? Or if it fails? Eventually a default of interest on the Junior debt payments would have occurred. Default Event A Default Events means the occurrence of one of the following:-a. An event of default under the Credit Agreement; b. An event of default under the Senior Credit Agreement; and c. A Bond Event of Default (breach of Condition of the Resettable Bonds, Stabilisation Notes, or the PLNs). Only Majority Senior Lenders can waive a Senior Event of Default and only Majority Co-financiers can waive a Credit Agreement Event of Default. In relation to a Bond Event of Default, if materially adverse to the interests of the Senior Lenders, theCo-financiers or the Banks, the consent of the Majority Co-financiers is required to any waiver (depending on the seriousness of the default).Otherwise the consent of the Bond Trustee is required if the Bond Trustee is of the opinion that the interests of the Bondholders will not be materially prejudiced.If the Majority Co-financiers waive any Credit Agreement Event of Default, the Bond Trustee is obliged to waive any Bond Event of Default arising out of the same facts, except for any Bond Event of Default arising from a payment default under theBonds. Accordingly, if a payment default occurs under the Bonds, which exceeds a GBP15m threshold, therefore triggering a Credit Agreement Event of Default, even if the Majority Co-financiers waive this as an event of default, if the Bond Trusteedoes not, a Default Event will have occurred and the Standstill regime will be triggered.Consequently, non-payment of interest under the Resets after 31 December 2005, when Stabilisation Advances end and the first Reset interest payment is missed in June 2006, is a real possibility. The calling of an event of default by the Bond Trustee is a Default Event where priority of payments do not prefer or aid the Resets, and under the AAL they can not enforce, accelerate its debt or exercise any security rights. NB: The following mechanism details are not exhaustive. The following Default, Standstill, and Enforcement (with or without acceleration) yield different priority of payment mechanisms, they are voted upon by different groups of creditors, and may well be used as levers in restructuring negotiations rather than intentions by certain creditors to really enforce or accelerate.Standstill Period A Standstill Period can be instigated upon events such as a non-payment of interest (as noted above) and when voted into place (unless defaults are waived) by particular parties.A Standstill Period will terminate upon the earliest of:a. the occurrence of an Enforcement Event; b. a determination by the Majority Co-financiers that the Standstill Period should terminate (subject to a minimum Standstill Period of 6 months);c. waiver of all Default Events under the Senior Credit Agreement and the (Junior) Credit Agreement, and from the Bond Trustee in relation to its bonds;d. 18 months after the commencement of the Standstill Period or a later date as agreed by the Majority Senior Lenders, the Majority Co-Financiers, EIB and ECSC; ore. approval of a restructuring plan (which needs Special Majority Co-Financiers approval).Other than Enforcement, the Majority Co-Financiers control (and in relation to paragraph (e), the Special Majority of Co-Financiers control) the termination of the Standstill Period. Effectively, the MBIA vote capacity can reverse the effect of a Standstill regime, provided that there has not been a (highly unlikely) Senior Event of Default.During a Standstill Period, all cash available after the primary standstill liabilities (which includes operating expenses, senior debt interest and scheduled principal, the fixed coupon for the PLN, Fourth Tranche interest and its scheduled principal), and assuming that Senior have not activated a mechanism which traps further cash for Senior obligations, is split with up to 75% used to service Junior debt financing costs, including interest and scheduled principal on: Junior debt,, Stabilisation Advances and Notes, Resettable Advances, PLNs and Equity. The remaining 25% of excess cash is retained in an escrow account until such amount is equal to the outstanding amount of the Senior debt and Fourth Tranche combined, at which point they would be discharged.The commencement of the Standstill Period does not accelerate the principal on the Junior debt with the priority of payments amongst the Junior debt remaining:1. Interest on Tier 1; then 2. Interest on Tier 2; then 3. Interest on Tier 3; then 4. Scheduled Principal on Tier 1; then 5. Scheduled Principal on Tier 2; then 6. Scheduled Principal on Tier 3. The changes in the waterfall effectively turbo a portion of the cash for debt service towards the prepayment of the Senior debt. Given the quantum of Eurotunnel’s cashflow that will accumulate relative to the quantum of Senior debt, the latter could conceivably be repaid over a 3 to 4 year time horizon.Given that the interest coverage on the debt structure is weakened under the 75:25 split, this would most likely result in interest shortfalls to the Tier 3 debt – something which Tier 3 debt holders, including MBIA would wish to limit.Enforcement In the unlikely event of non-payment of Senior debt during a Standstill an Enforcement Event is triggered.Otherwise, as a general rule, security can not be enforced, unless legal process is enforced against the assets of Eurotunnel or an administrator is appointed, presumably by a non-AAL lender, in which case both the Majority Senior Lenders and the Majority Co-Financiers may decide to enforce.The cash waterfall following an Enforcement Event or when a Standstill period has ended, other than because the Default Events have been waived to a Restructuring Plan approved, isa. Prior to notice being given to the Security Trustee instructing it to take action under the English security, after fees, basically: Senior debt only. Senior debt can approve proceeds flowing to Junior debt. Nothing will flow to Infra-Junior Stabilisation notes and Bondholders without the approval of the Junior.b. After notice is given to the Security Trustee, to enforce the priority of payments is Senior debt, fees, then1. Interest on Tier 1; then 2. Principal Tier 1; then 3. Interest on Tier 2; then 4. Principal on Tier 2; then 5. Interest on Tier 3; then 6. Principal on Tier 3. This Enforcement and Security Trustee enacted cashflow priority is attractive for Tier 1-weighted creditors (such as MBIA) compared with the Standstill interest then principal. Hierarchy Amongst Eurotunnel’sTiers of Debt As creditors enter debt-restructuring talks and figures are quoted concerning debt being written off, questions are raised as to which tranche of debt is affected. It is difficult to understand why existing Junior debt would yield much to Infra-Junior debt (notional GBP2.1bn) any rights when GBP4.4bn of debt exists above it and the following clause 16.4.1 from the Agreement Amongst Lenders (“AAL”) specifically prohibits any acceleration or enforcement by them without the consent of Majority Co-Financiers.There are many more mechanisms in Eurotunnel’s financing arrangement than this, but this clause is a corner stone of many of the agreements’ hierarchy mechanisms and a clear line between Junior and Infra-Junior (as to voting, priority of payment waterfalls, an event of default in Infra-Junior affecting Junior; or Junior affecting Senior, etc.) under certain scenarios.“. . . each Project Lender, each Resettable Facility Bank, each Stabilisation Facility Bank and the Bond Trustee [for the debt in Bond format] hereby agrees that it shall not without consent of the Majority Senior Lenders 4 and the Majority Co-Financiers 5 and shall not during Standstill for so long as the restrictions set out in Cl.18.36 apply:- i. Commence…. enforcement of any of the Financing Agreements (including for the payment of any amount due thereunder) or forthe termination thereof; or ii. take any step whether due to or, which may reasonably be expected to result in, the dissolution of [Eurotunnel] including taking any step to declare immediately payable any amount . . . ; or iii. exercise any of its rights under or in connection with any security g ranted under or pursuant to the Security Agreements. “ In the knowledge of such subordination provisions, why would GBP4.4bn of Senior and Junior debt join in voting for an event of default for GBP500m of Resets, when the consequential mechanisms stil leave Senior and Junior debt mechanisms senior to the Resets?Of course, as negotiations continue amongst creditors and consent is required from Infra-Junior debt for write-offs something may be given to these subordinated creditors, but it is almost impossible to build financial rationale behind the end numbers, and how much pain Junior debt would have to suffer, and time-horizon, to get the deal completed. For certain players, a “nuisance factor” may yield more financial return than legal mechanisms.
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