One should avoid the trap of media and political recuperation



Jacques Goujon, CEO of Eurotunnel has undeniable skills as communicator (interview on French TV last night) and there is no reason to doubt either of his competence or the sincerity of his efforts to reach an agreement with creditors in restructuring the company’s debts. This having been said, should one be surprised or even more “scandalised” by the attitude of Deutsche Bank who has refused to condone the restructuring agreement, forcing the Board of Directors to seek protection of the French Commercial Court?


It is appropriate to situate the matter in its proper context: indeed, this is not the first “restructuring”; the last one, fruit of tough negotiations back in the year 2000, had already lead to sacrifices, in particular on behalf of holders of “junior” and “subordinated” debt, and included a provision by which a proportion of this debt was converted into ordinary shares. The agreement was predicated on a “business plan” that was supposed to demonstrate the viability of the restructured company, whose debt service had been significantly reduced. Among the safeguard clauses, it was agreed that if the company could not meet its commitments, the creditor banks could take over control of the company, substituting for the shareholders.


This solution had allowed, at the time, to protect somewhat the interests of shareholders who, though finding themselves considerably diluted by the conversion of debt into shares, were better off than loosing “everything”, had the company been put into liquidation. At the time there was considerable pressure exercised on the banks, notably by the French Government who may have felt some moral responsibility towards the small shareholders, given the strong support it had expressed for the project. Furthermore, some of the lenders had also taken a prominent part in the Public Offerings of Eurotunnel shares. Having provisioned their loans in their books, they may have preferred to accept the restructuring rather than run the risk of complaints or even legal action by investors.


One should recall the basic legal principle that, in a case of bankruptcy, creditors always have priority over shareholders. The latter are deemed to accept the risks relating to their investments as a quid pro quo for their profit expectations which are potentially much larger than the fixed contractual return of lenders.


What is the situation today?


The business plan that was formulated by the company and accepted by the lenders has proved unworkable leading, 6 years later, to the threat of bankruptcy. Would it not seem normal to explain in the first place in a fully transparent manner the reasons for this failure and, in the event, to identify those who bear the responsibility for this situation?


The company’s debt is divided in three categories, each having a different legal status:


-          The Senior debt: The outstanding amount is relatively limited and is held by institutions such as the EIB and the ECSC (in liquidation). Its status ensures absolute priority in repayment of outstanding interest and principal in case of bankruptcy so that its holders are assured, whatever the outcome, to be fully reimbursed. There is no reason for these holders to consider any concessions in any restructuring plan. It should be noted that any such concession would mean that the burden would be assumed by the European taxpayer (including citizens of the new Member States).There can be no doubt that both the Community Budgetary Authority (Parliament and Council) and the Court of Auditors would request, quite appropriately, the basis on which a decision leading to the cancellation of any part of the claims was taken. The protection of the rights of small shareholders could not by itself constitute an acceptable justification.

-          The junior debt: It ranks next in the order of priorities in reimbursements in bankruptcy procedures. Its amount is sufficiently large for its holders to realise that a judicial liquidation of the company would not allow its full repayment. Agreeing to the restructuring proposal can therefore appear to be the best option in minimizing losses over the long run.

-          The subordinated debt: Ranking last among debt holders, it is clear that there can be little expectation of any recovery of their claims. They are therefore the most exposed and would bear the brunt of any safeguards agreed for the benefit of shareholders.


It should be born in mind that any restructuring must obtain the approval by a qualified majority (75%) of debt holders, voting separately by category.


Deutsche Bank owns a “blocking minority” of the outstanding subordinated debt and has used its power to withhold agreement to the restructuring proposal.


There can be several rational explanations for this attitude:


-          The bank could judge that it was not in its best interests to agree to the restructuring while waiving the contractual right to assume, jointly with other creditors, full control of the company according to the “substitution” clause granted in the previous restructuring. There is no reason to question this right freely negotiated and accepted at the time by the shareholders. The unfortunate circumstances that make this clause enforceable are no justification for ignoring it.

-          The Bank might fear criticism by its own shareholders whose rights, after all, are at least on par with those of Eurotunnel.

-          Finally, unilaterally abandoning the substitution clause, which maintains some residual value for shareholders of a virtually bankrupt company, creates a dangerous precedent. It complicates the execution of bankruptcy law, by increasing the threat of legal actions by shareholders based on this example. (It would be useful that the EU consider drafting an appropriate Directive covering bankruptcy law which would clean up and bring up to date existing national legislations which are recognised to be both out of date and badly suited to the current economic environment).


It is also important to draw attention to the fact that any pressure, in particular of a political nature, brought to bear in favour of the (unfortunate) shareholders, could only lead to dearer credit conditions and further rationing in a context where there is unanimous agreement on giving priority to “growth and employment”.


In conclusion, it behoves all parties to abstain from casting anathema on each other. The media should also adopt a responsible attitude avoiding condemning explicitly or implicitly “the big capitalist banks” for exploiting “the poor defenceless small shareholders”.


The Company acted responsibly in seeking protection from the Court; Let each stakeholder adopt a position that is both coherent and responsible.


Brussels, 14th of July 2006


Paul N. Goldschmidt

Director, European Commission (ret.)






























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