For those who aren't familiar with Canary Warf, it's the posh name given to what used to be known as Isle of Dogs in London. In this case, the historical name is much more fitting for the group who are based there today. It was Thatcher's business park dream where big finance would be based and until recently, was churning out massive profits, much of which were false as we now can see. Canary Warf is ugly in a "this looks like a US suburb with tall buildings instead of London" kind of look. Think Houston-like ugly, though at least without the heat. The London banksters - including AIG - are all out there though fortunately for Londoners, it's a bit of a hike to reach the area.
As the market boomed, this was the place to be and riches were flowing. Now that the market is tumbling, everyone is struggling including the property owner who bought out the original (failed) property owner. Seems like they are highly and on the brink of being called on it. If Songbirds Estates (the property owner) cross the limit, they have to quickly deliver a substantial amount of cash which they probably do not have available.
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.Looking at the market direction, it's unlikely there will be a major turnaround. If anything, the conditions for renting office space are likely to get worse as the year goes on.
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.
On a side note, there remains a high concern about European banks who were even more highly leveraged than their American counterparts. To date their losses have been limited though many are keeping a close eye on Eastern Europe where euros were loaned. Those loans may present banking issues later in the year for the highly leveraged banks. Never a dull day in the world of big finance.
