Global Economics

Crunch Time for Canary Wharf


Falling commercial real estate prices and the collapse of key bank tenants could cause the owner of East London's financial center to breach its loans

The banking giants Bear Stearns and Lehman Brothers collapsed as the financial meltdown turned the world on its head last year and now their former landlord is teetering on the brink.

The company that owns Canary Wharf, a Thatcherite vision of unabated capitalism, says it may violate the terms of its bank loans as the value of office space in the financial hub tumbles.

The price slump since some of its biggest tenants departed has seen Songbird Estates Plc come close to breaching covenants on an £880m loan, due in May 2010, issued by Citigroup (C).

"If a covenant breach were to occur then the lender would have the right... to request early repayment of outstanding borrowings," Songbird said. "This represents a material uncertainty which may cast significant doubt on the group's ability to continue as a going concern and…it may be unable to realise its assets and discharge its liabilities in the normal course of business."

The company has hired the investment bank Rothschild to advise it on its options. The former owners of the Canary Wharf project, who began construction at the former docklands site in 1988, went bust in 1992 as a result of a property slump.

Songbird has fallen into the covenant trap that has caught British developers. They often borrow a high amount to invest in property, subject to a condition called a debt-to-value ratio covenant which sets a limit to debt on the company books, relative to the property's value. The drop in real estate prices has caused the value side of the ratio to fall, putting developers under pressure despite the fact few have been borrowing.

The company's loan-to-valuation ratio stands at 86.1 per cent, close to a covenant limit of 87.5 per cent set on a loan. The ratio is tested every three months. Tests in May and August will be based on the current property valuations so the company expects to pass, Songbird's chief executive, John Garwood, told The Independent.

But a November test will use updated valuations and if they are much lower, the company will be in breach of the covenants. It then has 60 days to resolve the problem. "So we wouldn't have a real issue until January," said Mr Garwood.

Songbird has two key problems: what to do when the loan expires, as the tougher financial climate means it may have trouble refinancing; and second, that a covenant breach before then may force it to restructure. Other British property companies have had to resort to emergency rights issues this year totalling over £2bn as they fight to pay down debts and repair balance sheets.

Songbird said its net asset value per share fell 70 per cent last year. The market value of its property portfolio fell 26.5 per cent year-on-year to £4.9bn at the end of December as the economic crisis hit its mainly financial services tenants.

Despite the collapse of tenant Lehman Brothers in September, Mr Garwood said the former Lehman building remained fully occupied and Songbird was protected from any rental defaults on the property for the next four years, through an agreement with the troubled US insurer AIG (AIG).

Highs and lows: The history of Canary Wharf

Canary Wharf takes its name from a warehouse where fruit shipped from the Canary Islands was stored.

The port started to decline in the 1950s and the docks were closed in the 1970s. In 1980, the London Docklands Development Corporation was founded.

From 1981 to 1985, 1.8 million square feet of commercial development was completed and 2,500 homes were built.

Three US banks proposed the site be turned into a large-scale financial hub in the mid-1980s and the real estate company Olympia & York (O&Y), took over the project in 1987. Construction began in 1988 and in 1991, the US finance company State Street became the Wharf's first tenants.

The commercial property market collapse in 1992 forced O&Y to file for bankruptcy. It exited administration in 1993 as many firms relocated to the Wharf.

An international consortium, Canary Wharf Limited, backed by the ex-owners of O&Y and other investors, bought the scheme in 1995. Numbers working there doubled from 7,000 in 1993 to 14,000 in 1996. There are now more than 90,000.

Songbird Estates, a group of investors, bought 66.3 per cent of shares in 2004.

Provided by The Independent—from London, for Independent minds

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