Eurotunnel-overview

Brief history
Interesting facts
Background
Ownership Structure
The Concession
Contractual Structure and Contracts
Estimated costs
Terms and conditions of loan facility
Problems
Financial Restructuring.
Conclusion

The Chunnel Project-a 250 year old dream.As

much as 250 years ago people in France were
trying to think of a better way than boat of
crossing the Channel

Why not a bridge?

Engineering and geological studies
showed that at a depth of 40 meters
below the seabed,chalk merged with
clay to form a uniform stratum of
chalk marl, the best tunnelling medium
in the world.
The Channel is the busiest seaway in
the world with over 600 shipping
movements per day. Any bridge would
be rammed by a ship. Risks of such an
accident would have been greater
during construction than during

Eurotunnel-some interesting facts

1. Recognized as one of the Seven

Wonders of the Modern World by the
American Society of Civil Engineers.
2. They didnt quite meet in the middlethe English side tunnelled the greater
distance.
3. Avge. depth 50 mtrs, lowest 75 mtrs
below seabed.
4. 11 boring machines were used to dig
the tunnel, weighing 12000 tons(more
than Eiffel Tower), each as long as two

Eurotunnel-some interesting facts

5.Upto 400 trains pass through the tunnel each day
carrying an average of 50000 passengers, 6000
cars, 180 coaches, 54000 tonnes of freight.
6.On Dec. 18 2009, five Eurostar trains broke down,
trapping 2000 passengers for 16 hours, without
power, food and water.
7.Introduction of a pet travel scheme more than
one million dogs and cats have travelled.
8.Travelling time 35 minutes.
9.Lining of tunnel designed to last for 120 years.
10. The most amazing fact is that three tunnels
could be excavated so close together and still meet
in the right spot in both countries. (laser technology)

Eurotunnel-Background

The largest privately financed

infrastructure in history. (1997).
First seriously considered 200 (1802)
years ago.
Comprises three tunnels connecting
Britain to Continental Europe.
An extraordinary engineering featThree 50km long tunnels with 38km
,bored 40 meters below the seabed.
Took 7 years to build from Dec.1987May 1994.

Eurotunnel-Background

Originally conceived as a combination of

two functions: Financing and
Construction.
Two groups of promoter: Banks and
Construction companies
The construction side was handled by a
massive consortium of 10 contractors
called TransManche Link (TML) + 5
banks, making 15 founder share
holders. (evenly divided between
English & French, like almost everything
else in this project)

Promoters and Founder Shareholders

Construction Companies (Contract with
TML a JV)
Five UK Companies (TransLink)
Five French Companies (TransManche)
Banks (Arranging Eurotunnel Credit)
Two UK Banks (Midland, Natwest)
Three French Banks (Credit Lyonnais,
Banque Nationale de Paris, Banque
Indosuez)

Eurotunnel-Background

In May 1984,5 Arranging Banks (British/ French)

presented to the governments of UK and France,
a report detailing how a fixed link across the
English Channel, consisting of a twin-bore rail
tunnel, may be project financed entirely with
private capital.
The banks teamed up with some of the largest
construction companies in the UK and France to
form the Channel Tunnel Group Ltd (CTG) in the
UK and France Manche S.A.(FM) in France.
CTG-FM became a partnership to develop the
Eurotunnel System.

Ownership Structure for the Eurotunnel

Project
Eurotunnel
SA (France)

100%

Eurotunnel
PLC (UK)

100%

79%

Eurotunnel
Finance
S.A

21% Eurotunnel
Finance
Limited

France
Manche
S.A.
(France)

Eurotunnel
General
Partnershi
p

100%

Eurotunnel
Developme
nts
Limited

100%

The
Channel
Tunnel
Group Ltd.
(UK)

1.Eurotunnel Finance Ltd and Eurotunnel Finance SA would

manage Eurotunnels finances.
2.Eurotunnel Developments Ltd would enter into JV agreements
to develop properties in UK for business opportunities arising
from the system.
3. The relationship between the various subsidiaries within the

Eurotunnel-Background
April 1985- The British & French governments issued
an Invitation for Promoters for Financing ,
Construction, and Operation of a fixed link across
the Channel, without recourse to government
funds or guarantees.
10 proposals received in Oct. 1985. 4 shortlisted:
1. EuroRoute:4.8 Bn. Part bridge/tunnel road/ rail.
2. CTG-FM Eurotunnel System:2.6 Bn. twin-bore rail
tunnel.
3. Eurobridge:5 Bn. 23 mile composite fiber
suspension bridge.
4. Channel Expressway: 2.5 Bn. Twin-bore road
tunnel with separate rail tunnel.

Eurotunnel-Background
January 1986-CTG-FM Eurotunnel
System was selected as the winning
project.
February 1986-British and French
governments signed a treaty by
which they authorized construction of
the Eurotunnel system and granted the
Concession to the winning bidders CTG
(UK) and FM (France).

The Concession
Gave CTG-FM the right to build and operate
the Eurotunnel System for a period of 55
years. Later extended to 65 years, expires in
2052.
On expiry it has to hand back the system to
British and French governments in good
working order.
CTG-FM have the freedom to establish tariffs
and determine operating policies.
British and French governments committed
that no competing fixed link could be before
the end of 2020 without CTG-FMs approval.

The Eurotunnel system

Twin rail tunnels (length 50 km, dia-7.6

meters) and a service tunnel under the
English Channel.
Two terminals, one at Folkestone near
Dover in the UK and the other at
Coquelles near Calais in France.
Specially built shuttles to carry
passenger and freight vehicles between
the terminals.
Inland clearance depots for freight at
both ends.

Eurotunnel-Project Contractual Structure

Main Contracts

Construction Contract
Railway Usage Contract.
MdO contract
Financing Agreements
Insurance contracts.
Partnership and Corporate Structure
Agreements.

Construction Contract withTML

The construction contract had 3 parts.

1. Target Works-Tunnels and underground
stuctures.
2. Lump-sum works-The terminals,fixed
equipment (?), mechanical and
electrical elements.
3. Procurement items-Locomotives and
the shuttles.

1.Target Works-Tunnels & underground structures

1. About 50% of the contract price.

2. On a cost-plus basis providing for a
12% profit margin. (Was this correct?)
3. Incentive structure-if actual cost <
target cost TML would receive 50% of
savings. If actual cost > target cost
TML would pay 30% of cost overrun
subject to a maximum of 6% of target
cost. (A revised agreement later
increased the 6% to 30%)

2.Lumpsum works-Terminals,Fixed equipment, M & E

Payment on a lump-sum basis.TML would realize all
savings from if actuals < budget, but would have to
bear the full cost of any cost overrun.
3.Procurement Items-Locomotives and Shuttles.
a)TML would subcontract these items.
b)Eurotunnel would pay the subcontractors directly.
c) TML would supervise the subcontractors.
Reimbursed for direct costs and paid a profit margin
equal to 12% of the value of the procurement items.

Construction contract-main features

1. TML liable for damages of 350,000 per day

for delays up to 6 months and 500,000 per
day thereafter.
2. TML obligations secured by a performance
bond equal to 10% of the total contract
value to be released on completion of the
project.
3. 5% of the progressive payments would be
withheld or covered by a performance bond
during the construction period. Withheld
payments or the bond would be released in
two installments, 12 months and 24 months
after completion.

Construction contract-main features

4. The 5 British and 5 French parent companies of
TML would also give guarantees covering 100% of
TMLs contractual obligations.
5.TML would not be entitled to any release from
obligations due to strikes from its own labour force.
6.But general strikes interrupting flow of materials
would be force majeure events, leading to
extension of completion deadlines.
7.TML would not be liable for delays/cost overruns
due to (a) changes in specs. made by Eurotunnel
(b)actions taken by British or French governments
bedrock conditions that turned out to be
different from those reasonably expected.

Railways Usage Contract

1. Only committed source of income. This
contract will provide 35-40% of Eurotunnels
expected revenue.
2. Eurotunnel to make half the tunnel capacity
available to British, French and Belgian
railways for their Eurostar and freight trains.
3. Railways pay a fixed charge + tolls based on
the volume of traffic passing through the
tunnel. Railways also contribute to Eurotunnels
operating costs.
4. A minimum charge level. A mechanism to
ensure a guaranteed level of cash flow to
Eurotunnel over the first 12 years of operation.

MdO Contract

The Maitre dOevre (MdO) is an

independent Consulting Engineer
who advises the IGC, banks and
Eurotunnel on construction, safety etc.

Estimated cost and proposed financing

Number of Banks

A group of 50 banks who underwrote

the deal, syndicated it very
successfully to more than 200 banks.
This made the task of managing the
Credit Agreement much more difficult.

Terms and conditions of project loan facility

1. Use of funds(80% capex ,20% standby)
2. Conditions precedent to drawdown.
3. Availability(7yrs),repayment(18yrs) and
refinancing.
4. Fees to Syndicating Banks.
5. Interest
6. Security(assets,Concession,Performance bonds)
7. Negative pledge.(No other business/borrowings)
8. Events of default.
9. Default cover ratios
10.Third party loans(European Investment Bank 1b)
11.Multicurrency options.

Conditions precedent to drawdown

In addition to customary conditions precedent in
Euromarket syndicated loans, the following
conditions would have to be fulfilled:
1. A third equity issue would have to be completed
to increase total equity capital to 1.0 billion.
2. Capital expenditure of at least 700 million
would have to be funded out of equity capital.
3. Satisfactory construction progress as specified
in the Credit Agreement would have to be made
4. The banks would have to continue to be
reasonably satisfied with the validity of the
capital cost estimate.

Events of default
Eurotunnel would be in default under the
Project Loan Facility, if any of the following
events occurred:
1. One of the default cover ratio tests is not
met.
2. Eurotunnel System opening is delayed for
more than one year.
3. An unremedied breach of Eurotunnels
obligations occurs.
4. Once repayment starts, amounts
outstanding under the Project Loan Facility
exceed certain specified amounts.

Default cover ratios

Eurotunnel would not be able to make

any drawdowns if:
1. the ratio of PV of projected net cash
flow to bank outstandings is below 1.2.
2. To partially refinance if the ratio is
below 1.3.
3. To pay dividends if the ratio is below
1.25.
A decline of the ratio below 1.00 for
90 days or more would constitute an
event of default.

Problems during construction period

Problems involved three technical area:
1. Tunnelling-ground conditions on the British
side proved worse than expected. Salt water
in the rock effected the performance of the
tunnel boring machines, causing delays and
expensive modifications to machinery.
2. Rolling Stock-Unexpected increases in costs.
For example the IGC required fire doors
conecting the shuttle wagon to be widened
by 10cm. Seems minor, but required
substantial and costly re-engineering.
3. Design changes

Problems-Design changes
1. No cooling system envisaged in the
original proposal.
2. Friction caused by trains and heat
generated by electrical equipment could
raise temperature to 50 degrees celcius.
3. An elaborate cooling system was installed
carrying chilled water through several 100
kms of pipng.
4. Due to air pressure created by trains
travelling at 160 kph, tunnel components
needed to be re-designed to new
aerodynamic standards.

Impact of construction problems

1.
2.
3.
4.

Accumulation of financing costs.

Increase in labour costs.
Costly modifications to equipment.
Delayed start to operations resulting in
delay of revenue.

Financial Problems
1995 Apart from increase in construction
cost,it was clear actual revenues were well
below target
Sept. 95 interest payments on junior debt were
suspended. Junior debt was the bulk of total
debt
Breathing space-banks agreed not to pursue
unpaid interest through legal channels while
Eurotunnel tried to resolve its debt problems.
Cash flow problem were due to
1. Fierce price competition by ferry companies.
2. Failure of railways to develop traffic
3. Increase in operating costs

Proposal for Financial Restructuring of debt-May

1997

The plan relates to an estimated 8.7

billion of Junior Debt and unpaid
interest outstanding as of October
1996.
Objectives-to reduce the actual amount
of debt also the cost of debt.
Achieved in a number of ways, resulting
in an extremely complex set of financial
arrangements.
Debt equity swap at 130p per share,
reducing outstanding debt by 1 billion.

Proposal for Financial Restructuring of debt-May 1997

Interest rates on the Junior Debt and

new instruments are fixed for 7 years at
levels below market rates.
Results in significant lengthening of the
maturity profile of Eurotunnels debt.

Current Position
On a more stable footing, paying its
first dividend in 2009 and begun to
pay down net debt that stands at
4.1 billion.

Conclusion

The Eurotunnel Project illustrates the

cost overrun risk and economic risk that
accompany large ambitious
transportation projects, particularly
when there are competing (?) modes of
transportation.
High leverage can bring financial
problems.
A reminder of the dangers of overoptimism when it comes to major
infrastructure projects.Its optimistic
passenger forecasts left the tunnel,