The Channel Tunnel operator has asked a French court to freeze its debts to enable it to continue operating while a Judge tries to mediate a solution.

It has been trying to persuade its bondholders to back a deal to cut its 8.7bn euros (£6.2bn) debt pile in half.

But a dissident group of creditors has refused to support the proposals.

Services continuing

Despite its severe financial problems, Eurotunnel has insisted that it will continue to maintain services between the UK and the continent.

"I fail to understand how an institution such as Deutsche Bank has maintained its unreasonable demands" - Jacques Gounon, Eurotunnel chairman

Eurotunnel had given itself until Thursday morning to reach an agreement, warning that insolvency was a real possibility if no deal was brokered.

It has now applied to the Commercial Court of Paris for protection from its creditors, an alternative to the Chapter 11 bankruptcy procedure used in the US.

The process will prevent the firm from defaulting on its debts while a court-appointed administrator tries to put together a survival plan.

Eurotunnel's management hit out at a minority group of creditors led by Deutsche Bank, which holds about a third of the firm's debt, for blocking its restructuring plans.

"I fail to understand how an institution such as Deutsche Bank has maintained its unreasonable demands without taking into account the consequences on the 2,300 employees and 800,000 shareholders of Eurotunnel," chairman Jacques Gounon said.

Construction legacy

The crisis at Eurotunnel has its origins in the construction of the Channel Tunnel, completed in 1994.

The tunnel cost about 14bn euros ($17.7bn; £9.8bn) to build, but traffic has never been nearly as heavy as was originally forecast, hurting Eurotunnel's revenues.

If approved by the courts, the "Procedure de Sauvegarde" would give Eurotunnel a six-month window of protection from creditors while it tries to restructure its debts.

It agreed a preliminary restructuring plan with its priority lenders and Goldman Sachs, Barclays, Axa and Macquarie Bank back in May, which would see Eurotunnel's debt cut by more than 50% to £2.9bn.

However, some bondholders have complained that they are being offered too little money to support the restructuring, and are seeking a different deal which would leave them with cash and shares in the firm.

The bondholders are the lowest-ranked debt holders, very unlikely to get any of their money back if Eurotunnel is declared insolvent.

Even if a deal had been struck with bondholders, the preliminary restructuring agreement would have had to be put to Eurotunnel shareholders at an extraordinary general meeting on 27 July.

Some of them have voiced their opposition to the deal.

See also:

Key facts about the Channel Tunnel

Reuters: July 12

Anglo-French tunnel operator Eurotunnel was set to enter a final round of talks aimed at averting bankruptcy on Wednesday.

* TIMELINE:

1751 - Engineer Nicolas Desmarets suggests the idea of digging a tunnel under the English Channel.

1802 - French Emperor Napoleon Bonaparte backs a scheme for a tunnel for horse-drawn carriages under the Channel.

1880 - Colonel Ernest Beaumont makes first serious attempt to build tunnel. Britain later stops project on defence grounds.

1955 - British government lifts ban on Channel Tunnel.

1994 - Britain's Queen Elizabeth and French President Francois Mitterrand formally open the Channel tunnel.

* TUNNEL CONSTRUCTION:

-- The first tunnelling machine in the marine service tunnel began excavation in December 1987 on the English side, and this broke through to the equivalent French tunnel in December 1990. -- The twin 31-mile (50 km) tunnels, built by 15,000 workers who put in 170 million man hours whisks trucks and cars on trains under the channel in just 35 minutes between Folkestone in southern England and the north-eastern French port of Calais.

* MONEY TROUBLES:

-- The Channel Tunnel operator warned creditors it will go technically bankrupt unless it reaches a debt deal by midnight (2200 GMT) on Wednesday, but reassured travellers trains will keep running whatever the outcome of the talks.

-- The original 1986 concession called for private funding when the then British Prime Minister Margaret Thatcher insisted that "not a public penny" should be sunk into the 31-mile tunnel.

-- Delays in the start of train services in 1994 and lower traffic figures than anticipated exacerbated financial problems.

-- Eurotunnel took on massive debts to dig the rail tunnel an engineering masterpiece which has never paid its way. The loss-making company has debt interest payments which are equivalent to more than $850 every minute.

-- Eurotunnel's current debt pile stands at 6.2 billion pounds ($11.4 billion)

Update:

Eurotunnel cancels July 27 shareholder meeting

Reuters: Jul 13, 2006

PARIS - Anglo-French Channel tunnel operator Eurotunnel said on Thursday it had decided to cancel its July 27 shareholders meeting after failing to agree on a debt restructuring deal.

"At its meeting in Paris today, the Joint Board of Eurotunnel decided unanimously to cancel the General Meetings of Shareholders of Eurotunnel Plc and Eurotunnel SA, planned for 27 July, and confirmed its intention to place the Group under the protection of the Paris commercial court (Tribunal de Commerce de Paris)," the company said in a statement.