Bankruptcy protection feared for parent of east coast mainline

Bankruptcy protection feared for parent of east coast mainline

Dan Milmo, transport correspondent
Thursday October 12, 2006
The Guardian


Sea Containers, the owner of the GNER rail franchise, could file for bankruptcy protection in the US by next week as it braces itself for a default on a $115m (£62m) bond payment.
The struggling group must make the payment by Sunday and there is mounting speculation within the rail industry that the Bermuda-registered company will seek shelter from its creditors. With little chance of it being able to meet further bond payments over the next six years, US-listed Sea Containers could apply for Chapter 11 protection in order to complete a financial restructuring without the threat of corporate collapse hanging over its operations. If the group does miss the payment on Sunday as expected and does not safeguard itself against bankruptcy, it risks a creditor filing to put the business into liquidation immediately.

Corporate restructuring experts said putting Sea Containers into Chapter 11 will not force the company to relinquish the GNER London-to-Edinburgh service. Bob MacKenzie, chief executive of Sea Containers, has said he is determined to hold on to GNER, which would be a core asset in a slimmed-down parent company focused on containers and rail. GNER is in discussions with the Department for Transport over renegotiating the terms of the 10-year franchise, which guarantees the government £1.3bn in payments.
Having admitted that the franchise is unsustainable under the current financial terms, GNER is hoping that the government will set a precedent by renegotiating the premium payments. If the DfT stands by its refusal to alter the terms, GNER could keep the franchise going for another two years but it would have to hand back the east coast mainline service by 2008 as the payments become increasingly onerous over the term of the franchise, say industry observers.

Restructuring experts said the parent company could file for bankruptcy protection, while leaving most of its subsidiary companies including GNER free to continue operating. GNER is partly ring-fenced from the difficulties at Sea Containers because it has a $54m emergency overdraft and a $27.5m bond that it can draw on to make the quarterly payments to the government. It also has separate banking and credit facilities. Sea Containers and the DfT declined to comment.

Mr MacKenzie said in August that the company was under pressure to complete a restructuring before the bond payment falls due: "The anticipation that we will not be able to pay the senior notes due on October 15 2006 unless we have adequate working capital and can be sure of our ability to pay the other public notes maturing in subsequent years, puts a critical time pressure on the restructuring process."

According to the latest unaudited Sea Containers accounts, the company has $80m in free cash and debts of $610m.

Chapter 11 protects a company from its creditors and gives the business breathing space of up to 18 months to repair its balance sheet. Under Chapter 11 proceedings, a bankruptcy court judge has the power to approve, amend or throw out a company's recovery plan. Creditors can lobby the judge for changes to the plan and their approval is required for a company to exit Chapter 11 protection.