Eurostar's begging letter shows tunnel vision
Eurostar, the company which runs trains through the Channel Tunnel between London and Europe, is angling for a UK government-backed bailout loan. It is a ruse that can most generously be described as cheeky. If the company really needs cash to survive, there are many more appropriate ways of raising it in the capital markets.
The cross-Channel train operator issued a public appeal on Monday, aimed at the UK government.
It said it was “encouraged by the government-backed loans that have been awarded to airlines and would once again ask that this kind of support be extended to international high speed rail, which has been severely impacted by the pandemic. Without additional funding from government there is a real risk to the survival of Eurostar, the green gateway to Europe, as the current situation is very serious.”
Meanwhile, a bunch of executives styling themselves as “London’s business leaders” under the banner London First, has written to the government, fearful of the peril Eurostar finds itself in. The coronavirus pandemic has caused passenger numbers to plummet.
The business leaders worry that, as Eurostar is neither an airline, nor a domestic railway, it falls “between the cracks of support” [sic]. They were referring to recent UK state-backed loans to British Airways and EasyJet.
It is a weak appeal. Once London First has rightly raised the threat to the jobs of the 2,700 people it believes Eurostar employs directly or indirectly, its next best argument is about ferrying French students to and from London.
There are many strong arguments for the UK not to go along with this demand.
The tunnel itself and the high speed track from London to the continent are strategic assets of national importance. But they are owned separately.
All Eurostar does is run trains. Railway operators come and go. If any country has come to realise that any joker can — and often does — run a railway, it’s the UK, where the coming and going, operationally speaking, has often left much to be desired.
If Eurostar went under, someone else would doubtless — once the economic recovery is under way — be keen to run what is close to being a monopoly: the only way for foot passengers to go by rail between the UK and Europe.
And then there is the dubious benefit of allocating UK taxpayers’ money to a company 55% owned by French state rail group SNCF and 5% by the Belgian government.
Should the UK offer help, but ask for something in return — like an equity stake? That might seem a reasonable demand, but since the UK sold its stake in Eurostar some years ago, it would be a strange about-turn.
Where to turn?
The owners would be the natural and most obvious source of fresh capital. But they say there is no more available, since the French government has already given Eurostar a €200m shareholder loan for working capital and liquidity, earlier in the pandemic.
You cannot blame Eurostar for appealing to the UK, but it should be going to the capital markets for money if the owners won’t stump up.
The company is not listed, so a rights issue is out. But France, which has shown a desire for privatisations under president Emmanuel Macron, could list some of SNCF’s stake through an IPO. The deal could also include a fresh capital raising.
French equity bankers think this would be a tough sell — investors tend to have a short-term outlook. A flotation would doubtless appeal to a smaller coterie of buyers than most listings.
But Eurostar has a strong case that it will emerge from the pandemic well, once the recovery gets going. The rail service between London and the continent is clearly essential — not least to the capital markets, which rely on it for constant traffic and commuting between two of Europe's main financial hubs.
It is the only means of public transport that offers an alternative to flying between London and several cities, including Paris and Brussels. It takes foot passengers from city centre to city centre, usually with less hassle and stress than flying.
It is also greener than air travel, at a time when travellers are becoming more conscious of their carbon footprints.
If an IPO is a no-go, then private equity funding may be a possibility — seeking cash from a specialist infrastructure player, for example.
France or SNCF may object to the dilution that fresh equity investors would bring. But the debt markets are in the middle of an almost unprecedented spree of cheap funding.
They have shown a willingness to provide crisis cash to transport businesses with far less robust-looking operations than Eurostar’s.
Earlier this month, bond investors decorated Hungary-based budget airline Wizz Air — a business in a sector rife with competition when not grounded by the pandemic — with €500m of three year money. They demanded a coupon of just 1.35% in return and order books topped €2bn.
Even Carnival, the cruise line operator — hardly essential travel — has been able to raise unsecured bond funding during the pandemic, after its initial rescue refinancing in April, when it pledged its fleet as collateral.
If investors will back companies like these, they will surely find the time and money for a business with a solidly entrenched position like Eurostar, whose trains are in normal times usually packed.
But even if Eurostar cannot persuade bond investors to lend it money, it has recent form in the bank loan market. It was only in June that Eurostar took out one year term loans of €184m and £188m.
With vaccine programmes up and running and bank loan teams frustrated at the amount of business they have lost to the bond market, loan funding should be available, even if Eurostar has to pay up, or turn to some fresh lenders.
The train operator’s funding route should be as obvious as the tracks it runs on — the capital markets, not the UK, should provide the money.
Additional reporting by Sam Kerr and Mike Turner