Eurotunnel warning

THERE is a grave danger that Eurotunnel's forthcoming rights issue will be followed by a capital restructuring within four years, according to a report prepared by Klesch, the specialists in distressed debt.

The report, to be published tomorrow, predicts that shareholders' funds will be substantially diluted as banks swap some of their debt for equity.

It calculates that should Eurotunnel's revenues be 25 per cent less than its forecasts, it will run out of cash and banking facilities in 1998/9.

A 15 per cent revenue shortfall would drain Eurotunnel of cash and banking facilities by 2001/2.

The report concludes: 'It is clear that Eurotunnel simply cannot afford the financing costs of its debt burden. This cost is undermining a project which was intended to be cash- generative. The current funding round will not be the last, given the imbalance in the capital structure of the company and its vulnerability to any downturn in revenue.'

Eurotunnel is expected to tap the stock market for a pounds 750m rights issue in mid-May, shortly after its opening ceremony on 6 May. Banks are expected to find another pounds 650m.

Eurotunnel's forecasting record is not good. Its estimates for the cost of building the Channel tunnel have doubled to pounds 10bn. And this is not the first time its revenue forecasts have been called into question.

It recently reached a settlement with its contractor Transmanche Link over additional costs - a peace treaty needed to clear the way for May's vital fund-raising.

Eurotunnel would not comment on the Klesch report.