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The Eurotunnel Project - Cam Ready.pdf

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  1. 1. Project Appraisal and Finance Assignment THE EUROTUNNEL PROJECT September 2021
  2. 2. Introduction to Team 01 Roll no. 22B Nidhisha Mehta Roll no. 4B Amit Kumar Roll no. 13A Hemant Gosain Roll no. 32A Shashank Pawar Roll no. 35B Sumit Verma Roll no. 6A Ankur Kanda Roll no. 16A Kshitij Aren
  3. 3. The Eurotunnel Project was initiated in 1984. The construction was planned as a twin-bore rail tunnel with associated infrastructure, rolling stock, and terminals. Scheduled for 1993, it would join the rail systems of the United Kingdom, France, and the rest of mainland Europe upon completion. Its comfortable, fast, frequent, and reliable service would furnish a valuable link between the United Kingdom and France, beneath the English Channel. The project had symbolic value. It was initiated at about the time when members of the European Economic Community (EEC) were ratifying the Single European Act to create a single integrated European economicsystem by 1992. The project was also innovative since the method of financing, which provided for private capital to bear the long-term infrastructure developmentrisk, had not been tested in the world capital markets for decades. Case Introduction 02
  4. 4. Historical Background 03 1973: French President and British PM signed a treaty to construct a twin-bore rail tunnel under the English Channel. 1980: Investigations probed the possibility of constructing a fixed link across the English Channel (i.e., a bridge or tunnel), financed purely by private capital. 1984: The Banks subsequently teamed up with some of the largest construction companies in the United Kingdom and France to form The Channel Tunnel Group Limited in the United Kingdom and France Manche S.A. in France (CTG and FM, respectively). 1985: Interested parties were invited to submit bids for the financing, construction, and operation of a fixed link across the Channel without recourse to government funds or guarantees. 1986: The Eurotunnel System was selected as the winning project. 1986: The British and French governments signed a treaty by which they authorized construction of the Eurotunnel System and agreed to grantthe concession to operate the Eurotunnel System(the “Concession”) to the winning bidders, CTG in the United Kingdom and FM in France. CTG-FM then provided £50 million in seed capital (referred to as “Equity Offering I”). The Concession gave CTG-FM the right to build and operate the Euro- tunnel System for a period of 55 years from the date the treaty was ratified
  5. 5. The Eurotunnel System Provision Twin rail tunnels and a service tunnel under the English Channel. Two terminals, one at Folkestone near Dover in the United Kingdom and the other at Coquilles near Calais in France. Specially built shuttles to carry passenger and freight vehicles between the terminals. Inland clearance depots for freight at the French terminal and at Ashford (near Folkestone) in the United Kingdom. Connections to nearby roads and rail facilities. Each of the two main tunnels would have an internal diameterof 7.6 meters and a total length of approximately 50 km. In addition, there would be a service tunnel or 4.8 meters internal diameter. Cross-passages would link it to the main tunnels. The service tunnel would provide ventilation to the main tunnels. It would also facilitate routine safety and maintenance work and provide a safe refuge in case of emergency. Two crossovers were planned between the rail tunnels. These would allow trains to continue to operate during periods of tunnel maintenance, albeit at a reduced frequency on a single track. The Eurotunnel System Provision 04
  6. 6. Project Ownership Structure The ownership Structure for the Eurotunnel Project could be described as a dual-bodied transnational hybrid. It involves parallel group of companies with common shareholders. The two groups are separately registered as : Ø Eurotunnel PLC – located in the United Kingdom Ø Eurotunnel S.A. – located in France These two groups are joined together in a general partnership (hereafter referred to as “Eurotunnel”). 05 The Ownership structure for the Eurotunnel Project is shown above.
  7. 7. Construction 06 Construction was to be carried out by a consortium of construction firms known as Transmanche Link. The consortium entered into a single general- obligation contract to design, construct, test, and commission a fully operational rail system within seven years of signing the construction contract. The construction contract was signed in August 1986.Transmanche Link was a joint venture of Translink of the United Kingdom, which consisted of five leading British construction firms, and Transmanche Construction of France, which consisted of five leading French construction firms.The construction contract was divided into three principal part. The tunnels and underground structures would comprise the target works. They would account for about 50 percent of the con- tract price. The contractors would be paid for the target works on a cost-plus basis providing for a 12 percent profit margin. The construction contract contained an incentive structure: If the actual cost were less than the target cost, Transmanche Link would receive 50 percent or the savings; if it were more, Transmanche Link would pay 30 percent of the cost overrun, up to a ceiling equal to 6 percent of the target cost Target works.
  8. 8. Construction (contd...) 08 The terminals, the fixed equipment, and the mechanical and electrical elements of the Eurotunnel System would comprise the lump-sum works. They would be paid for on a lump-sum basis. Transmanche Link would realize all the savings ii the lump-sum works were delivered under budget, but would have to pay the full cost of any cost overrun. The lump-sum words. These items consisted of the locomotives and the shuttles. Transmanche Link would subcontract for these items. Eurotunnel would pay the subcontracted bid price directly to the subcontractors. Transmanche Link would oversee the bidding and supervise the subcontractors. It would be reimbursed for its direct costs and paid a profit margin equal to about 12 percent of the value of the procurement items. The procurement items.
  9. 9. Construction (contd...) 08 Transmanche Link would be held liable for damages of about £350,000 per day for delays up to 6 months, and £500,000 per day thereafter if the Eurotunnel Project breaches the completion deadline. The obligations of Transmanche Link would be secured by a performance bond equal to 10% of the total value of the contract. In addition, 5% of the amount due to Transmanche Link as progress payments would be withheld or covered by a performance bond during the construction period. The payments or the bond would be released in two installments, 12 months and 24 months The five French and five British parent companies of Transmanche Link would also give general guarantees covering 100% of the contractual obligations. Joint liability of each of the French parents and the several liability or each of the British parents was limited to 50% & 10%, respectively.
  10. 10. Construction (contd...) 09 Changes in specifications Actions taken by the Governments Bedrock conditions that turned out to be different then expected. Transmanche Link would not be entitled to any release from obligations due to strikes by its own labor force Transmanche Link would be liable for delays and cost overruns caused by accidents or flooding. However, it would not be liable for delays or cost overruns caused by: It was widely believed that construction of the Eurotunnel System would not be a difficult technical exercise. Conditions for construction of the Euro- tunnel System were excellent. The risk of interruption of service following completion was low. Eurotunnel and Transmanche Link believed that once the 3 tunnels were completed, only a major earthquake could cause the tunnel to flood and collapse.
  11. 11. Construction costs - 2.8 billion Corporate and other costs - 0.5 billion Provision for inflation - 0.5 billion Net financing costs - 1.0 billion Euro tunnel estimated that this project would cost approx. £4.8 billion. Where, To meet these cost and cover possible cost overruns, They planned to raise £6 billion (1 billion via equity and 5 billion via loans) Project Financing 10 Arranging Banks obtained letters from 33 banks to underwrite loans of approximately £4.3 billion. Following the Eurotunnel Project's selection (1986), the founding shareholders contributed equity of £50 million (which constituted Equity Ordering I). The Arranging Banks then worked to increase the size of the underwriting syndicate to 40 banks and to formalize their lending obligations in a collective binding commitment to underwrite a £5 billion syndicated loan. The Arranging Banks planned to complete syndication after the construction contract had been signed and a further equity ordering (Equity Offering II) had been completed. Eurotunnel planned a second issue of shares (Equity Offering II) in June 1986. Eurotunnel hoped the issue would raise an additional £150 to £250 million. The Arranging Banks would then syndicate the £5 billion project loan and enter into the underwriting agreement. A third equity offering, would raise the balance of the £l billion or equity. It was planned for the first half of 1987. So, to solve this problem of raising this much amount of fund for a greenfield venture without any guarantee of third party, Eurotunnel planned to raise the funds in stages: It was anticipated that during the Eurotunnel System's first full year of operation, 79% of its total costs would consist of capital charges (i.e., interest and depreciation). Capital charges as a proportion of total costs would decline steadily thereafter.
  12. 12. Economic Risk 11 Two largest direct customers of the Eurotunnel System: Eurotunnel expected to have a competitive advantage over existing cross Channel transportation—via ferry, hovercraft, and airline services. Eurotunnel’s services would be less vulnerable to the adverse weather conditions in the Channel that can seriously disrupt ferry and hovercraft crossings Eurotunnel commissioned various marketing studies. The marketing studies concluded that the Eurotunnel System was eco- nomically feasible. They projected that the total cross-Channel traffic market would grow from 48.1 million passenger trips and 60.4 million tonnes of freight in 1985 to 88.1 million passenger trips and 122.1 million tonnes of freight by 2003. They concluded that the Eurotunnel System would be able to capture a large proportion of this srowins market. 17 percent of cross-Channel freight traffic would go through the Eurotunnel System, according to the studies. The marketing studies also concluded that the Eurotunnel System’s existence would lower the cost of travel and thereby generate a certain amount of new traffic. 1. The two national-government-owned railway companies, 2. British Rail (BR) and Société Nationale des Chemins de Fer Francais (SNCF), would be the.
  13. 13. Project Financial Results 12 United Kingdom gross domestic product would grow at 2.15 percent p.a. between 1985 and 2003 and at 2.00 percent p.a. between 2003 and 2013. The growth rate in traffic was assumed to decrease each year after 2013, reaching zero in 2042. No alternative fixed link across the English Channel would become op- erational before the concession period ends in 2042. The tariffs the Eurotunnel System charges would, on average, equal the ferry tariffs on the Dover-Calais route and would remain constant in real terms. Rail usage charges would conform to the specifications of the railway usage contract, and the high-speed railway linking Brussels, Paris, and the Eurotunnel System terminal in France would be operational by the time the Eurotunnel System opened. Eurotunnel would be permitted to make duty-free and tax-free sales to shuttle passengers Traffic and revenues would conform to the traffic and revenue projec- tions prepared by Eurotunnel’s traffic and revenue consultants. Subject to restrictions contained in Eurotunnel’s loan agreement, all profits available for distribution each year would be distributed as dividends to shareholders. The sterlingiranc exchange rate would remain constant at Al:FF10 throughout the entire concession period. The rates of inflation in revenues, overhead, operating costs, and capital expenditures would be identical each year. The specific annual inflation rates assumed in preparing the projections were: 4.0 percentin 1987; 4.5 percent in 1988; 5.0 percent in 1989; 5.5 percent in 1990; and 6.0 percent in 1991 and thereafter.
  14. 14. Project Debt Financing 13 In February 1986, 5 banks ( National Westminster Bank, Midland Bank, Banque In- dosuez, Banque Nationale de Paris, and Crédit Lyonnais ) were agreed to finance Eurotunnel Project worth GBP 5 Billion and also been asked to give the pre- underwriting commitments that would be conditional on several key events & conditions. The Arranging Banks had good reason to approach the market in this slightly unorthodox manner. They felt it was essential for them to augment their underwriting commitments—rumoured to be approximately £4.3 billion—in order to secure commitments for the full £5.0 billion budgeted for total credit facilities. The total loan amount would be denominated in three currencies: Amount Sterling Equvalent £2,600 million FF21,000 million US$450 million £2,600 million £2,100 million £300 million The sterling equivalent was: GBP 1.00 = FF10.00 = US$1.50. 80 % of the funds would be used to pay for budgeted capital costs and the other 20 % would be available in the form of a stand-by cost overrun facility.
  15. 15. 14 Project Equity Financing 45.9 percent of the equity of Eurotunnel PLC (EPLC) and Eurotunnel S.A. (ESA) to were offered to investors through the issuance of 220 million paired shares with warrants attached (Units). Equity Offering III was intended to raise GBP 770 million of equity to bring the total equity raised for the Eurotunnel Project to GBP l.023 billion. Equity Offering II, a private placement consisting of £200 million worth of Eurotunnel paired shares, was launched in October 1986. It had been undersubscribed in the United Kingdom, and demand in the United States had been disappointing. Political and organizational uncertainties, which had led to doubts about whether the Eurotunnel Project would ever be built, were largely responsible. The British subunderwriters had avoided significant losses due to (1) oversubscription in France, Japan, and Germany and (2) the Bank of Enqland’s pressuring investment houses in the City of London to subscribe.
  16. 16. Projected Returns to Equity Investors The life of the Eurotunnel System, from the investors’ perspective, would have three distinct phases:2 (1) the construction period (1987—1992), when equity funds would be invested; (2) the start-up period (1993—1995), when final testing would be conducted, operations would commence, and dividend payments would commence; and (3) the main operating period (from 1995 to the end of the concession period in 2042). 15 In addition to dividends, Eurotunnel offered travel privileges to individual subscribers’ to Equity Offering III
  17. 17. Sensitivity Analysis Eurotunnel prepared a number of sensitivity analyses in addition to its “best guess” cash flow projections (the “Best Case”). The sensitivity analyses tested the effects on project performance of changes in key variables: 16 The above table summarises the results of these sensitivity analyses and compares them with the base case
  18. 18. Sensitivity Analysis (contd…) 17 Source: Eurotunnel P.L.C./Eurotunnel S.A., offer for sale of 220000000 units with New Warrants (November 16, 1987), pp. 56- 57; and R.C. Smith and I. Walter, “Eurotunnel-Debt,” p. 7.
  19. 19. THE EUROTUNNEL SYSTEM- ORIGINALLY SCHEDULED TO OPEN IN MAY’93 FINALLY OPENED IN MAY’94 WITH REGULAR SERVICING OF PASSENGERS IN NOV’94 A 18 Sensitivity Analysis (contd…) HEY WOUND UP COSTING £ 10.5 BILLION- DOUBLE THE ORIGINAL ESTIMATE OF £ 4.8 BILLION WHICH LED TO A DISPUTE WITH TRANSMANCHE LINK WHICH IN TURN DELAYED CONSTRUCTION. THEY ALSO PAID AN EQUIVALENT AMOUNT OF £ 532 MILLION IN A RIGHTS ISSUE IN 1990 WHICH WAS UNDERWRITTEN BY TEN LEADING ISSUING HOUSED IN FRANCE AND U.K. B THE COMPETITION OF FERRY OPERATORS CUT FARES WHICH LED EUROTUNNEL TO BELIEVE THAT THEY WOULD NOT BREAK EVEN BY 1998 AND SOON RUN OUT OF CASH. C THEY ANNOUNCED A CASH RAISE OF £ 1 BILLION HALF BY BORROWING FROM INTERNATIONAL CONSORTIUM OF 220 BANKS AND OTHER HALF BY A SECOND RIGHTS OFFERING. D THEY CONDUCTED AN UNDERWRITTEN OFFERING TO RAISE EQUIVALENT OF £ 816 MILLION AND AT THE SAME TIME ARRANGED A £ 647 MILLION CREDIT FACILITY E THE 1994 THREAT OF FARE ERUPTING LED TO A LOT OF FERRY OPERATORS TO CUT FARES SHARPLY AND FURTHER DELAYS OF PASSENGER SERVICE MEANT THEY WOULD FAIL TO MEET PROFIT PROJECTIONS OF MAY’94. THIS IN TURN THREATENED TO PUT EUROTUNNEL IN VIOLATION OF CERTAIN COVENANTS IN ITS BANK LOAN AGREEMENTS WHICH WOULD LEAD TO ANOTHER CASH CRISIS F EUROTUNNEL’S SITUATION WORSENED IN 1995 WITH AN AGGRESSIVE AIRLINE ADVERTISING TO PROMOTE COMPETITION ON THE LONDON-PARIS ROUTE, A STRIKE BY FRENCH TRAIN OPERATORS AND A BRUISING FARE WAR WITH ENGLISH FERRY OPERATORS G
  20. 20. In Sept’95 Eurotunnel suspended interest payments on more than £8 million in bank loans and hoped to negotiate a debt-restructuring agreement that would satisfy both- 225 creditor banks and 760000 shareholders- which was achieved in 1998. Eurotunnel struggled to manage high leverage for 2 decades. A French court in Aug’2006 placed Eurotunnel in bankruptcy. The main creditors and suppliers approved a restructuring plan that would reduce Eurotunnel’s debt by 54%, to £2.9 billion from £6.2 billion. The French court approved the restructuring plan in January 2007. 19 Sensitivity Analysis (contd…) Subsequent Developments: Conclusion The Eurotunnel Project illustrates the cost overrun risk and economic riskthat accompanylarge, ambitioustransportation projects. This is particularly so when there are competing modes of transportation—in this case, ferries— whoseoperatorsmayreduce faresinordertocompete.Eurotunnel Project’sexperiencehighlightsthefinancialproblem sthathighleveragecanbring. In spite of its financial difficulties, as of the date regular passenger servicebegan, the European financial community generally felt that the EurotunnelProject would continue to operate. However, it recognized that Eurotunnelwould require a financial restructuring to reduce its debt burden. Ultimately, the twogovernments and the creditor banks have so much at stake that the EurotunnelProjectisprobablytoobig andtoovisible tobeallowedtorail.
  21. 21. Thank You

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