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Eurotunnel Bankruptcy Ensnares `Jerks in Manhattan' Hedge Funds
By Steve Rothwell, John Glover and Alan Katz
Sept. 19 (Bloomberg) -- Eurotunnel SA shareholder Nicolas Miguet stood on a rusty ladder outside the old Paris stock exchange on Sept. 14, addressing a crowd of 200 through a megaphone, before leading a march to the Paris Commercial Court.
``If people invest their money it's for their children or their retirement, not to give it to jerks in Manhattan who buy Dom Perignon by the case to fill up their bathtubs,'' shouted Miguet, 45, who plans to seek the French presidency next year. ``This is a fight of good against evil.''
Miguet's so-called jerks include Goldman Sachs Group Inc., Deutsche Bank AG and New York hedge funds Elliott Management Corp. and Resurgence Asset Management. It's a taste of what bondholders face in trying to get their money back from Eurotunnel, which filed for bankruptcy protection two months ago.
The operator of the U.K.-France rail link under the English Channel used a French law that came into effect Jan. 1 and that gives bond investors no vote in how a company reorganizes in bankruptcy proceedings. Eurotunnel, based in Paris and Folkstone, England, filed with the French court on July 11.
As a result, the sophisticated investors have little prospect of recovering all their losses. Eurotunnel bonds have tumbled as much as 30 percent in the past four months, reducing their value by about $250 million.
The investors, typically the first to exploit profit opportunities, didn't even know the company had entered bankruptcy proceedings until hours after the filing during a meeting with company officials, according to ARCO, which represents bondholders who own $3.37 billion of Eurotunnel bonds.
No Power
``These guys should have thought of this when they put all of this dough into Eurotunnel,'' said Eric Cafritz, a Paris- based lawyer for creditors including Deutsche Bank. ``The standard hedge fund approach of kicking everybody's butt or pulling every lever just doesn't play out. They can't get their minds around it. It's hard for them to intervene.''
Eurotunnel's 862 million pounds ($1.6 billion) of 1 percent bonds maturing in 2040, the lowest ranking of its $11.7 billion of debt, trades at 10 percent of face value, down from as much as 18 percent in the past four months and 40 percent five years ago. Standard & Poor's cut ratings on the company's senior loans to `D' for default on Aug. 16 after Eurotunnel missed a payment to creditors.
France's new bankruptcy law lets companies seek protection from creditors, just as they can in the U.S. under Chapter 11. Until this year, 90 percent of French bankruptcies resulted in liquidation, according to law firm Allen & Overy, which has offices in Paris and London.
Not Chapter 11
In the U.S. and U.K., bondholders get paid before stock investors, who typically get wiped out. Under French law, neither gets a vote, so shareholders are at less of a disadvantage.
Bond investors in France have less chance of recovering assets than in Germany, the U.K. or 11 other European countries, according to credit analyst Fitch Ratings. New York- and London- based Fitch says it ranks senior debt sold by French companies on average one step lower than in the U.K. The difference means French borrowing costs are as much as 46 basis points higher than they would be otherwise, based on estimates by New York- based Lehman Brothers Holdings Inc.
Eurotunnel Chief Executive Officer Jacques Gounon, 53, a former French civil servant, says shareholders should have ``significant participation in the capital,'' according to a letter to shareholders on the company's Web site. He initially wanted creditors to write off $3.37 billion of debt in return for 1 percent of the stock plus $141 million in cash; shareholders would have gotten as much as 13 percent.
Gounon ``has continually insisted that shareholders get something back,'' said Alex Moss, a senior credit analyst at Insight Investment Management in London, which oversees the equivalent of $18 billion of corporate debt. ``In any other country in Europe they wouldn't have had a hope.''
More Than Politics
Miguet has more than political ambition at stake. Through personal holdings and a financial publishing company he controls, Miguet owns 6 million Eurotunnel shares, or 0.2 percent of the total. The stake was worth 2.6 million euros on May 12, the last day the shares traded.
He led a shareholder revolt in 2004 that ousted Eurotunnel's U.K.-led management and represented 19.5 percent of shares at the last annual meeting, in June 2005.
Banks including Goldman Sachs, that offered to underwrite a debt restructuring plan earlier this year, are trying to ``seize control of the tunnel,'' Miguet says.
Wearing faded jeans and an open-collared shirt, Miguet led supporters waving placards with his slogan ``For the Love of France'' on a 2 kilometer (1.2 mile) march past the Bank of France to the courthouse to meet Perrette Rey, one of three judges overseeing the case. He told Rey that interest on Eurotunnel's debt should be cancelled and the principal should be spread over 20 years, with the biggest chunk repaid in 2028.
`Extraordinarily Ill-Informed'
``The comments are remarkable only because they are so extraordinarily ill-informed,'' said Lucas van Praag, a spokesman for Goldman Sachs in London.
Eurotunnel spokesman John Keefe in Paris declined to comment or to make Gounon available. Officials at Deutsche Bank, Elliott Management and Resurgence Asset Management also declined to comment. Eurotunnel spokeswoman Mady Charbrier named the three companies as creditors in a phone interview in July.
``Some foreign hedge funds thought it was possible under French law to convert the debt into equity even without the agreement of shareholders, but it isn't,'' said Patricia LeMarchand, a lawyer at Willkie Farr & Gallagher in Paris, who's been advising hedge funds invested in Eurotunnel. ``This is a bit shocking for some hedge funds.''
Eurotunnel investors have been losing money ever since former British Prime Minister Margaret Thatcher and French ex- President Francois Mitterrand insisted in the 1980s that the project be funded without state help.
Seven Wonders
The tunnel ranks as one of the seven wonders of the modern world alongside the Panama Canal and San Francisco's Golden Gate Bridge, according to the American Society of Civil Engineers. Two tunnels, running 40 meters (131 feet) under the seabed, carry freight and passengers, and a third was built for maintenance. The 50 kilometer tunnel extended England's coastline by 90 acres by shifting 4.9 million cubic meters of chalk marl from under the English Channel and dumping it beside the Cliffs of Dover.
Bailing Out
Investors have been bailing out the company since 1990. They provided more than 3.2 billion pounds in new loans and bought 1.54 billon pounds of additional shares. By the time it opened in 1994, a year behind schedule, the tunnel had cost 8.9 billion pounds, almost double the original estimate.
In September 1995, little more than a year after opening, Eurotunnel suspended debt payments as passenger numbers failed to match its predictions. A fire on a freight shuttle in November 1996 caused the tunnel to England from France to shut for seven months.
Earlier this year, Eurotunnel shares were suspended after the company was forced to delay its earnings report. Eurotunnel isn't paying interest on any of its debt now, the biggest part of which is a 1.8-billion pound loan maturing in 2025.
Hedge funds, private pools of capital where managers participate substantially in the gain of the money invested, are seeking opportunities in troubled European companies. At least 23 funds that specialize in so-called distressed debt have set up in Europe, says Edward Altman, a professor at New York University's Stern School of Business and inventor of the ``Z score,'' used by analysts to assess the chances of default.
Elliott Management, founded in 1977 by Paul Singer, with about $6 billion of assets, and Resurgence, a unit of M.D. Sass, the $8 billion money manager, focus on financially distressed companies. Both are based in New York.
Bermuda, Cayman Funds
Europe's market for junk bonds has more than tripled to 65.9 billion euros since the end of 2000, according to data compiled by Merrill Lynch & Co. The U.S. market has almost doubled in that time. Distressed debt has returned 6.6 percent so far this year across Europe, up from 5.9 percent last year, Merrill indexes show.
Debt rated below BBB- by S&P and Baa3 by Moody's Investors Service is considered below investment grade, or junk.
The best hope for some hedge funds may depend on getting parts of the case moved to London. Funds based in Bermuda and the Cayman Islands asked judges to give up jurisdiction over some of the 17 units of Eurotunnel that are based outside of France, Judge Rey said in an interview. A decision is unlikely until at least December, she said.
Required to Consult
Under French law, Eurotunnel is required to ``consult'' all creditors. How much power bondholders can wield through consultation is unclear, said James Penrose, legal counsel for Standard & Poor's in London.
Rey, president of the Commercial Court and one of three judges whose approval is required for any accord by the creditor committees, says bondholders will be asked before any reorganization is agreed on.
``The fact is you can't avoid talking to bondholders,'' said Rey. ``The court is there to take into account the interest of all stakeholders, including all creditors. It must ensure that any deal assures the future of the company, the interests of employees and cuts Eurotunnel's liabilities.''
Election Scandal
Bondholders and companies have an incentive to reach an agreement before a 12-month deadline pushes Eurotunnel from bankruptcy protection to liquidation.
``People are being sensible now,'' said Phil Roantree, who holds some of Eurotunnel's 620 million pounds of 5.78 percent notes as part of the $5.67 billion he helps oversee at New Star Asset Management Ltd. in London. The bonds, which are rated AAA because they are guaranteed by insurer MBIA Inc., have lost 7.5 percent this year.
Half-a-million French shareholders own Eurotunnel stock following a government campaign almost two decades ago. Insolvency would be a political ``scandal'' in a presidential election year, according to Olivier Puech, a partner at Paris law firm Gide Loyrette Nouel.
``The thing that makes this unique is that the government is part of this,'' said Cafritz, a partner at Fried, Frank, Harris, Shriver & Jacobson LLP. ``You're not just negotiating with the management, you've also got the shadow of the state lurking behind.''
Investors see Eurotunnel as a test case for the French insolvency laws.
``Shareholders and employees get a big say in France and bondholders don't count for much,'' said Chris O'Hare, who helps oversee $23 billion of assets at Investec Asset Management in London, and holds French junk bonds including oil and gas field surveyor Compagnie Generale de Geophysique SA. ``We'll be watching this one.''
To contact the reporters on this story: Steve Rothwell in London at srothwell@bloomberg.net , or John Glover in London at johnglover@bloomberg.net , or Alan Katz in Paris at akatz5@bloomberg.net .
By Steve Rothwell, John Glover and Alan Katz
Sept. 19 (Bloomberg) -- Eurotunnel SA shareholder Nicolas Miguet stood on a rusty ladder outside the old Paris stock exchange on Sept. 14, addressing a crowd of 200 through a megaphone, before leading a march to the Paris Commercial Court.
``If people invest their money it's for their children or their retirement, not to give it to jerks in Manhattan who buy Dom Perignon by the case to fill up their bathtubs,'' shouted Miguet, 45, who plans to seek the French presidency next year. ``This is a fight of good against evil.''
Miguet's so-called jerks include Goldman Sachs Group Inc., Deutsche Bank AG and New York hedge funds Elliott Management Corp. and Resurgence Asset Management. It's a taste of what bondholders face in trying to get their money back from Eurotunnel, which filed for bankruptcy protection two months ago.
The operator of the U.K.-France rail link under the English Channel used a French law that came into effect Jan. 1 and that gives bond investors no vote in how a company reorganizes in bankruptcy proceedings. Eurotunnel, based in Paris and Folkstone, England, filed with the French court on July 11.
As a result, the sophisticated investors have little prospect of recovering all their losses. Eurotunnel bonds have tumbled as much as 30 percent in the past four months, reducing their value by about $250 million.
The investors, typically the first to exploit profit opportunities, didn't even know the company had entered bankruptcy proceedings until hours after the filing during a meeting with company officials, according to ARCO, which represents bondholders who own $3.37 billion of Eurotunnel bonds.
No Power
``These guys should have thought of this when they put all of this dough into Eurotunnel,'' said Eric Cafritz, a Paris- based lawyer for creditors including Deutsche Bank. ``The standard hedge fund approach of kicking everybody's butt or pulling every lever just doesn't play out. They can't get their minds around it. It's hard for them to intervene.''
Eurotunnel's 862 million pounds ($1.6 billion) of 1 percent bonds maturing in 2040, the lowest ranking of its $11.7 billion of debt, trades at 10 percent of face value, down from as much as 18 percent in the past four months and 40 percent five years ago. Standard & Poor's cut ratings on the company's senior loans to `D' for default on Aug. 16 after Eurotunnel missed a payment to creditors.
France's new bankruptcy law lets companies seek protection from creditors, just as they can in the U.S. under Chapter 11. Until this year, 90 percent of French bankruptcies resulted in liquidation, according to law firm Allen & Overy, which has offices in Paris and London.
Not Chapter 11
In the U.S. and U.K., bondholders get paid before stock investors, who typically get wiped out. Under French law, neither gets a vote, so shareholders are at less of a disadvantage.
Bond investors in France have less chance of recovering assets than in Germany, the U.K. or 11 other European countries, according to credit analyst Fitch Ratings. New York- and London- based Fitch says it ranks senior debt sold by French companies on average one step lower than in the U.K. The difference means French borrowing costs are as much as 46 basis points higher than they would be otherwise, based on estimates by New York- based Lehman Brothers Holdings Inc.
Eurotunnel Chief Executive Officer Jacques Gounon, 53, a former French civil servant, says shareholders should have ``significant participation in the capital,'' according to a letter to shareholders on the company's Web site. He initially wanted creditors to write off $3.37 billion of debt in return for 1 percent of the stock plus $141 million in cash; shareholders would have gotten as much as 13 percent.
Gounon ``has continually insisted that shareholders get something back,'' said Alex Moss, a senior credit analyst at Insight Investment Management in London, which oversees the equivalent of $18 billion of corporate debt. ``In any other country in Europe they wouldn't have had a hope.''
More Than Politics
Miguet has more than political ambition at stake. Through personal holdings and a financial publishing company he controls, Miguet owns 6 million Eurotunnel shares, or 0.2 percent of the total. The stake was worth 2.6 million euros on May 12, the last day the shares traded.
He led a shareholder revolt in 2004 that ousted Eurotunnel's U.K.-led management and represented 19.5 percent of shares at the last annual meeting, in June 2005.
Banks including Goldman Sachs, that offered to underwrite a debt restructuring plan earlier this year, are trying to ``seize control of the tunnel,'' Miguet says.
Wearing faded jeans and an open-collared shirt, Miguet led supporters waving placards with his slogan ``For the Love of France'' on a 2 kilometer (1.2 mile) march past the Bank of France to the courthouse to meet Perrette Rey, one of three judges overseeing the case. He told Rey that interest on Eurotunnel's debt should be cancelled and the principal should be spread over 20 years, with the biggest chunk repaid in 2028.
`Extraordinarily Ill-Informed'
``The comments are remarkable only because they are so extraordinarily ill-informed,'' said Lucas van Praag, a spokesman for Goldman Sachs in London.
Eurotunnel spokesman John Keefe in Paris declined to comment or to make Gounon available. Officials at Deutsche Bank, Elliott Management and Resurgence Asset Management also declined to comment. Eurotunnel spokeswoman Mady Charbrier named the three companies as creditors in a phone interview in July.
``Some foreign hedge funds thought it was possible under French law to convert the debt into equity even without the agreement of shareholders, but it isn't,'' said Patricia LeMarchand, a lawyer at Willkie Farr & Gallagher in Paris, who's been advising hedge funds invested in Eurotunnel. ``This is a bit shocking for some hedge funds.''
Eurotunnel investors have been losing money ever since former British Prime Minister Margaret Thatcher and French ex- President Francois Mitterrand insisted in the 1980s that the project be funded without state help.
Seven Wonders
The tunnel ranks as one of the seven wonders of the modern world alongside the Panama Canal and San Francisco's Golden Gate Bridge, according to the American Society of Civil Engineers. Two tunnels, running 40 meters (131 feet) under the seabed, carry freight and passengers, and a third was built for maintenance. The 50 kilometer tunnel extended England's coastline by 90 acres by shifting 4.9 million cubic meters of chalk marl from under the English Channel and dumping it beside the Cliffs of Dover.
Bailing Out
Investors have been bailing out the company since 1990. They provided more than 3.2 billion pounds in new loans and bought 1.54 billon pounds of additional shares. By the time it opened in 1994, a year behind schedule, the tunnel had cost 8.9 billion pounds, almost double the original estimate.
In September 1995, little more than a year after opening, Eurotunnel suspended debt payments as passenger numbers failed to match its predictions. A fire on a freight shuttle in November 1996 caused the tunnel to England from France to shut for seven months.
Earlier this year, Eurotunnel shares were suspended after the company was forced to delay its earnings report. Eurotunnel isn't paying interest on any of its debt now, the biggest part of which is a 1.8-billion pound loan maturing in 2025.
Hedge funds, private pools of capital where managers participate substantially in the gain of the money invested, are seeking opportunities in troubled European companies. At least 23 funds that specialize in so-called distressed debt have set up in Europe, says Edward Altman, a professor at New York University's Stern School of Business and inventor of the ``Z score,'' used by analysts to assess the chances of default.
Elliott Management, founded in 1977 by Paul Singer, with about $6 billion of assets, and Resurgence, a unit of M.D. Sass, the $8 billion money manager, focus on financially distressed companies. Both are based in New York.
Bermuda, Cayman Funds
Europe's market for junk bonds has more than tripled to 65.9 billion euros since the end of 2000, according to data compiled by Merrill Lynch & Co. The U.S. market has almost doubled in that time. Distressed debt has returned 6.6 percent so far this year across Europe, up from 5.9 percent last year, Merrill indexes show.
Debt rated below BBB- by S&P and Baa3 by Moody's Investors Service is considered below investment grade, or junk.
The best hope for some hedge funds may depend on getting parts of the case moved to London. Funds based in Bermuda and the Cayman Islands asked judges to give up jurisdiction over some of the 17 units of Eurotunnel that are based outside of France, Judge Rey said in an interview. A decision is unlikely until at least December, she said.
Required to Consult
Under French law, Eurotunnel is required to ``consult'' all creditors. How much power bondholders can wield through consultation is unclear, said James Penrose, legal counsel for Standard & Poor's in London.
Rey, president of the Commercial Court and one of three judges whose approval is required for any accord by the creditor committees, says bondholders will be asked before any reorganization is agreed on.
``The fact is you can't avoid talking to bondholders,'' said Rey. ``The court is there to take into account the interest of all stakeholders, including all creditors. It must ensure that any deal assures the future of the company, the interests of employees and cuts Eurotunnel's liabilities.''
Election Scandal
Bondholders and companies have an incentive to reach an agreement before a 12-month deadline pushes Eurotunnel from bankruptcy protection to liquidation.
``People are being sensible now,'' said Phil Roantree, who holds some of Eurotunnel's 620 million pounds of 5.78 percent notes as part of the $5.67 billion he helps oversee at New Star Asset Management Ltd. in London. The bonds, which are rated AAA because they are guaranteed by insurer MBIA Inc., have lost 7.5 percent this year.
Half-a-million French shareholders own Eurotunnel stock following a government campaign almost two decades ago. Insolvency would be a political ``scandal'' in a presidential election year, according to Olivier Puech, a partner at Paris law firm Gide Loyrette Nouel.
``The thing that makes this unique is that the government is part of this,'' said Cafritz, a partner at Fried, Frank, Harris, Shriver & Jacobson LLP. ``You're not just negotiating with the management, you've also got the shadow of the state lurking behind.''
Investors see Eurotunnel as a test case for the French insolvency laws.
``Shareholders and employees get a big say in France and bondholders don't count for much,'' said Chris O'Hare, who helps oversee $23 billion of assets at Investec Asset Management in London, and holds French junk bonds including oil and gas field surveyor Compagnie Generale de Geophysique SA. ``We'll be watching this one.''
To contact the reporters on this story: Steve Rothwell in London at srothwell@bloomberg.net , or John Glover in London at johnglover@bloomberg.net , or Alan Katz in Paris at akatz5@bloomberg.net .
I'm wondering if France deserves different valuation methods and a separate branch of corpfin theory due to this?
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