2.1 Under the terms of the original deal, LCR had planned to raise finance from private sector investors in two tranches:
a) "Financial Close 1" in May 1996 raised £430 million of debt and £60 million of equity for the design and enabling works of the Link, LCR head office costs and Eurostar UK losses up to "Financial Close 2";
b) "Financial Close 2" would have raised a further £1,000 million of equity and £3,000-£4,000 million of debt to repay the existing debt, fund construction of the entire Link and to make good any continuing Eurostar UK losses.
2.2 LCR's inability to complete the second stage of financing and the terms on which the project was restructured meant that these arrangements had to be amended. With the split of construction into two sections and Railtrack's option over Section 2 raising uncertainty about the amount and timing of finance required, it was agreed that "Financial Close 2" should only raise funds for the construction of Section 1. A third tranche of funds (Financial Close 3) would be raised at a later date to fund construction of Section 2 of the Link. However, as a result of the delay to "Financial Close 2", short-term funding would be required if LCR was to remain solvent during negotiations on the shape of a restructured deal. This was achieved by the sale-and- leaseback of eleven Eurostar trainsets, backed by a Government guarantee that LCR's obligations to make lease payments would be fulfilled until the sale-and-leaseback could be terminated when full funding became available.
2.3 In the restructured deal with LCR, the longer term funding of the Link and continued support for Eurostar UK operations depended on the Government's agreement to provide guarantees, pay grants to subsidise construction and operation of the Link and to lend money directly to LCR. Railtrack was also a key participant but LCR shareholders' entitlement to future dividends has been curtailed. In view of the complexity of the financing for this project, we commissioned RBC Dominion Securities (a part of the Royal Bank of Canada Group) to review a number of key areas on our behalf. The findings of this review are set out in full at Appendix 5 with references, as appropriate, in this part of the report.