Financial Distress, Lender Passivity and Project Finance: The Case of Eurotunnel

Abstract

The paper analyzes the difficulties of Eurotunnel, both the largest project finance company and one of the largest private workout in the history. Eurotunnel’s distress was primarily due to the wrong governance structure set up at the origin. Long-term contracts, far from limiting agency conflicts between the firm’s different claimants, led to major conflicts between initial sponsors. Once trapped by huge costs overruns, the banks transferred a significant part of their risks to poorly informed individual shareholders. We also investigate why the numerous banks did not trigger bankruptcy despite Eurotunnel’s chronic distress. Lender passivity was mainly due to highly specific assets, political pressures and the threat of legal pursuits under the French debtorfriendly bankruptcy law. If passive, the banks made no concessions in debt restructurings and the firm remained highly leveraged. Overall, the case suggests that (i) managerial opportunism is a minor problem in project finance. The failure of large project companies may be primarily due to unresolved conflicts between owners (ii) governance problems associated to dispersed equity ownership may be worse in project companies than in other less indebted firms (iii) banks can find optimal to maintain a firm in chronic financial distress in order to keep a high bargaining power in subsequent restructurings while avoiding a costly bankruptcy.