Eurotunnel Case Study
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A project finance case study using Eurotunnel
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case study Eurotunnel Project financeTranscript
We're going to use Euro Tunnel to examine some of the concepts we're learning about and apply them to a real situation as you'd normally expect, you start with an SPV, A special purpose vehicle. The British and French governments gave a concession to construct and operate a tunnel between the two countries. The financing was very detailed. The main shareholders initially were the governments, but one of the things that the British government wanted was to involve other shareholders, principally public shareholders. There were also some issues into public markets for equity. There weren't any bonds. It was primarily syndicated loans, and because it was such a large amount of money, they involved many, many banks after an initial syndicate of about 50 banks. Amazingly, when they sold down the loans, there were an additional 150 making a total of 200 banks in syndicate, and that was not actually a very good thing. The structure fell over. When you have 200 banks you're trying to negotiate with, things become very difficult as you'd expect. There was a heavy amount of engineering involved. There was an engineering contract and a separate construction contract with a separate company. Finally, there were supply contracts. You need electricity for the trains. You have an end user, which is a combination of freight companies and the general public, an operational and management contract with Eurotunnel. It was a very complex overall project. Let's look at the financing of Eurotunnel in detail.
Let's start with the equity financing. The founders, which are the governments, started out with an initial contribution of just 47 million, but then there was a private placement to institutional shareholders later on, and then a public share issue into the general public. There were also follow-on rights issues three and seven years later. It was at that point that the structure started to fall over. You can see there were continual additional issuances of warrant rights up to the year 2000. So in total, the equity raised externally was 2.7 billion. If we look at the debt facilities, 6.8 billion was the main financing debt issue. When the project got underway, there were also contributions from the European Investment Bank and the ECSC, the European Commission. One of the problems was that the project ran out of cash and the construction period was delayed. This is one of the biggest risks in these type of projects. It did two things. It increased the construction cost as you'd expect, but secondly, it also delayed the revenue coming in when the Project became operational. These two things can have devastating impacts, which is why the project went back to the market.
They raised an additional 647 of senior credit facilities and they had to keep going back the equity tranches. So unfortunately, Euro Tunnel wasn't a successful project. It did get done, but it was very painful and it probably wouldn't have got done, if not for pressure from the British and French governments.