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In 2006, Eurotunnel Group's chairman and CEO, has been with the company for only a year-and-a-half and is challenged with deciding if it would file for bankruptcy protection as a result of not having acquired the approval of a creditor for its out-of-court restructuring plan. While it is facing challenges, the company has been trying to restructure its debt and operations for the past years. Its shareholders face the possibility of dilution under any restructuring plan. If the current chairman and CEO goes with the decision of filing for bankruptcy, he also has to determine whether to file the same in the U.K. or in France. This decision is also significant as both take different approaches to restructure troubled companies.
Stuart C. Gilson; Vincent Dessain; Sarah L. Abbott
Harvard Business Review (209062-PDF-ENG)
March 03, 2009
Case questions answered:
- Why has the 1995-1998 restructuring of Eurotunnel not led to a sustained recovery from financial distress for Eurotunnel?
- Between the 1995-1998 and 2005-2006 restructurings, what has changed in the goals and constraints of creditors? shareholders? management?
- Does the Citigroup valuation of the company cited by the bondholders make sense? What could explain the difference with the implicit valuation contained in the PRA? (Note: you should use a multiples approach)
- Assuming the Loi de Sauvegarde is not enacted, is the prospect of going to court, either in England or in France, appealing to management? shareholders? creditors?
- In what sense can the terms of the Loi de Sauvegarde be useful to the management for undertaking a successful restructuring in the long-term?
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Case answers for Groupe Eurotunnel S.A. (A)
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1. Why has the 1995-1998 restructuring of Eurotunnel not led to a sustained recovery from financial distress for Groupe Eurotunnel S.A.?
The restructuring of the debt of Groupe Eurotunnel S.A. reduced the overall amount of debt but not to a sustainable level. In 1998, Debt was still nearly 24 times EBITDA which is way too high for any company regardless of its industry to be considered to have a sustainable amount of leverage. Additionally, not even the interest expenses could be covered by EBIT or operating cash flows (see Appendix).
This did not change for the better over the next 8 years as operations faced problems making a recovery from financial distress impossible. Economic growth in Europe slowed and traffic volumes shrank due to the outbreak of the foot and mouth disease in the UK as well as floods in France. Moreover, a price war initiated by ferry companies as well as a decline in sales of channel tunnel cables negatively impacted sales.
Furthermore, costs increased due to security efforts as a consequence of illegal asylum seekers in the tunnel. Management’s projections for the business which served as a basis for the restructuring were highly optimistic. In combination with the aforementioned operational problems, this resulted in continued financial distress.
2. Between the 1995-1998 and 2005-2006 restructurings, what has changed in the goals and constraints of creditors? shareholders? management?
The previous implied goal of the bondholders of being repaid in full has now changed to fighting for at least part of the junior debt remaining in place instead of being completely wiped out and left with cash and hybrids. In contrast to that, the senior debt holders’ goal of insisting on full repayment has not really changed since the previous restructuring.
Under the redressement judiciaire, creditors have no voting right with regard to a restructuring plan. This constraint could be lifted by the new Safeguard Act, which requires creditor approval for a restructuring plan. However, it was not clear whether bondholders’ votes would be regarded as relevant and whether…
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