Bank fees the stumbling block in Eurotunnel talks

EUROTUNNEL, the cash-strapped operator of the fixed link between Britain and France, is aiming to sign an agreement that will pave the way for restructuring its crushing £6.2bn debt by the end of the week.

Talks were continuing over the weekend to remove the last obstacle, reported to be disagreement over the scale of fees Eurotunnel would have to pay on behalf of its 122 banking creditors.

Under the terms of its borrowing agreement, it is obliged to pick up the fees of advisers called in by lenders to guide them in debt restructuring talks. But the tunnel operator, whose revenues are insufficient to pay its interest bill, is keen to cap additional outgoings.

Its board is reportedly eager to get a paving agreement for discussions in place ahead of Friday's board meeting.

That would give it 11 months to engineer one of the most complex financial restructurings undertaken by a European company. Eurotunnel confirmed talks were continuing, but did not elaborate.

The need for wholesale debt restructuring has long been apparent, because traffic through the tunnel, which opened a decade ago, has fallen far below forecasts while fares have been hit by tough competition from ferry operators.

As a result, the tunnel generates only enough operating profit to pay around half the interest on the company's debt. The balance is paid as 'stabilisation notes' - zero-coupon bonds which are convertible into shares - under a special waiver that expires on 31 December.

From November of next year, the company will also lose up to £40m of the annual £200m it gets from operators of passenger and freight trains through the tunnel when the present minimum usage agreement expires. And in 2007, it is due to start repaying its £3.2bn junior debt.

Mounting discontent among the 700,000 French private investors who own Eurotunnel stock led to a revolt at the company's annual meeting last spring, which replaced the board with a new set of directors led by former travel company chairman Jacques Maillot.

Maillot has briefed deputy chief executive Herve Huas to negotiate a debt restructuring with banking creditors, represented by agent banks HSBC and Calyon, the investment banking arm of Credit Agricole.

The preliminary agreement will allow talks to begin in earnest on a financial restructuring, expected to take the form of a debt-forequity swap that would hugely dilute existing shareholders.