Investors rap MBIA over Eurotunnel payout
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Investors rap MBIA over Eurotunnel payout

Monolines do not take on risk, they sell protection. Investors that buy wrapped bonds are not buying a triple-A bond, they are buying a financial guarantee. Fortunately, the default history of the industry means that investors do not have to dwell on the implications of this very often. But the protracted saga of Eurotunnel’s debt restructuring (which was finally resolved in January this year) is a salutary lesson for any investor as to what a monoline wrap actually means.

The end of the monoline?

Eurotunnel issued two transactions that involved wrapped tranches: the £432 million ($843 million) and €745 million Fixed Link Finance (FLF) 1 in December 2000 and the £740 million Fixed Link Finance 2 in May 2002. FLF 1 was backed by tier 1, 2 and 3 debt while FLF 2 was backed exclusively by tier 1 debt. MBIA wrapped bonds in both FLF1 and FLF2 and took senior Eurotunnel debt, and its aggregate exposure to the credit at the end of last year was $2.2 billion gross par and $1.6 billion net (of reinsurance) par.

Eurotunnel received final legal approval for its restructuring plan on January 15. Under the terms of the plan all tier 1 and tier 2 loans will be repaid while the tier 3 loans will incur a loss. FLF 1 has sufficient reserve funds to meet interest and principal payments in the short term and remains outstanding. But the lack of reserve funds in FLF 2 means that under the latest restructuring plan the bonds are to be redeemed once the plan is in place.

FLF 2 comprises a senior £620 million tranche wrapped to triple A by MBIA.

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