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MBIA ET
EUROTUNNEL
FINANCEMENT
DES COLLECTIVITES LOCALES ET ASSURANCE MONOLIGNE (MONOLINE INSURANCE)
MBIA
seeks Eurotunnel solution
By Charles Batchelor
Financial Times; Jul 07, 2004
When Eurotunnel's new management sits down with its bondholders to discuss its
financial restructuring, it will find itself dealing with MBIA, a specialist
credit insurer that has provided cover for $2.1bn worth of the tunnel operator's
bonds.
The entirely French Eurotunnel board that was elected in
early April following a
revolt of small, overwhelmingly French, shareholders in the troubled company,
gave itself 90 days - until today - to come up with a revised strategy to ease
its debt problems.
The rebels originally threatened to withhold repayment of the debt while
pressing for a government bail-out but Jacques Maillot, the chairman, later said
it would seek a renegotiation with its creditors.
As security for the risk it took on, MBIA acquired the voting rights to the debt
on which it has provided cover, making it probably the largest creditor in the
negotiations.
MBIA has insured most of the bonds issued by Fixed-Link Finance 1 and 2, two
special vehicles created in 2000 to repackage and reduce the cost of
Eurotunnel's debt. It effectively has the ability to control how the FLF
entities vote the Eurotunnel debt they hold.
The insurer is unwilling to disclose its likely stance in any bondholder
negotiations.
In a statement it said it believed "that a managed and comprehensive refinancing
plan that will simplify the capital structure and extend debt maturities will
improve the long-term financial condition and profitability of the business".
It is not alone among creditors in wanting to simplify the dauntingly complex
debt structure assembled by Eurotunnel over the past decade. Cost overruns and
over-optimistic traffic forecasts forced managements into a permanent
reshuffling of the company's liabilities.
An extension of maturities coupled with a likely conversion of debt to equity
are also a common feature of debt restructurings and look inevitable in
Eurotunnel's case.
But it is the scale of MBIA's exposure and the special nature of credit
insurance - which, unlike other branches of the industry, adopts a "zero loss"
approach to writing - cover that singles it out among those involved in the
Eurotunnel drama.
MBIA is the largest of a handful of companies - mainly US-based - that
specialise in insuring credit - in effect guaranteeing investors against a
bond's default.
They are commonly known as monoline insurers because of this specialisation.
Issuers that have had their bonds insured - also known as "wrapped" or
"enhanced" - get a higher credit rating from the rating agencies.
The credit insurers maintain a top-of-the range Triple A rating on their own
business to provide reassurance to their customers and to investors.
The industry grew up in the US in the early 1970s to provide cover for municipal
and state bonds. This was a fragmented market with a lot of small issues from
public bodies with often esoteric accounting methods.
Unlike other parts of the insurance industry, where claims can absorb the bulk
of premiums paid, the credit insurers aim for zero losses. They structure their
deals so that the possibility of default is remote. MBIA has paid out $236m,
equivalent to just 0.03 per cent of debt insured, since it started.
Budget pressures across all levels of US government led to a widespread
deterioration of the credit quality of the government organisations insured by
MBIA in recent years. But recent losses have not been in the government market
but in the corporate arena - a market that MBIA has since abandoned.
On its Eurotunnel cover, MBIA took the precaution of reinsuring $1.22bn of its
total $2.1bn exposure, although it was recently obliged to take a large part of
this cover back in-house when some of its reinsurers were downgraded by the
credit rating agencies.
The reinsured sum has been cut to $800m, leaving MBIA with direct exposure of
$1.3bn. But it is confident it will not suffer. "Given the seniority of the debt
we have insured and our significant role in any restructuring . . MBIA does not
expect any losses on its insured exposure," it said.
Unlike some Eurotunnel bondholders who will have bought into the company's debt
to make a quick profit, MBIA has a more long-term interest in the tunnel
operator's future. The scale of its involvement and its need to maintain a "zero
loss" approach to its underwriting give it a powerful incentive to defend the
value of its investment.
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