The debt secured against the 20 Canada Square office building in London’s Canary Wharf district did not, by historical standards, represent a high loan-to-value on origination.
UK high street lender Lloyds Banking Group issued the £265 million (€309 million) loan in 2017 with an LTV of 65 percent, against a property that had been purchased for £410 million. As the ink dried on that loan to Chinese property company Cheung Lei, there would have been few downsides to consider.
However, fixed charge receivers at restructuring firm Alvarez & Marsal have now been appointed following the borrower’s failure to repay the loan on maturity in October 2022.
In March, property consultant JLL had marketed 20 Canada Square for £250 million, according to Bloomberg – £15 million less than the debt secured against it.
20 Canada Square has become its lender’s problem. Many have said the refinancing crisis facing European markets – particularly in the office sector – is a ‘borrowers’ problem’, the logic being conservative LTVs would provide enough headroom for prices to fall without impacting the senior debt position. Borrowers, many argue, will be responsible for finding the solution for maturing loans, either through fresh debt, asset sales or equity injections – none of which has happened in this case.
In May, creditors of 5 Churchill Place, also in Canary Wharf and also ultimately owned by Cheung Lei, were forced to appoint administrators and receivers at advisory firm FTI Consulting after a loan secured against it, another 65 percent LTV facility on origination, matured without being repaid.
Banks’ real estate loan portfolios are in a stronger state than before the global financial crisis, when leverage above 80 percent was not uncommon. But what looked like conservative office loans in the latter part of the 2010s may now be uncomfortable for some lenders. Despite the comparatively low day-one LTVs, loans were written against peak asset values.
Also, owners of prime office buildings face a growing task retaining occupiers as tenants’ expectations around workspace change. Oil company BP, which leased six floors at the property, has not renewed its lease. Instead, it is taking space at US manager Blackstone’s trendier ‘Cargo’ building at 25 North Colonnade – also in London’s Docklands – as the company’s leadership seek to embrace hybrid working.
Further stress for senior office lenders can be expected as debt matures on buildings that have not survived a metamorphosis in the office sector and owners cannot sell or refinance.
Ireland’s Central Bank raised a flag on this in its financial stability review, published 7 June. It noted that, despite Irish lenders having typically had LTV ratios that allowed for substantial price declines, with the weighted average current bank LTV of around 50 percent, such positions were now at “elevated risks” because of the difficulties of raising collateral in a stressed market.
There is no such thing as a risk-free loan but the cataclysmic shifts in working habits prompted by unpredictable global events was a risk no-one could foresee.
The lenders at 20 Canada Square and 5 Churchill Place provided what was considered conservative financing in 2017. But the abrupt transformation of the office sector, and the impact of rising rates on property values, seems to have led to them being forced to act. As the office sector correction plays out, they will not be alone.