The view from Canary Wharf is brighter than it was in January. But the east London financial and leisure district still has a big problem. Its GBP4 billion ($6.84 billion) of debt is painfully high, and the pressures on parents Brookfield and Qatar Investment Authority to inject more cash have barely eased.
Last year brought some bad headlines for the estate, notably confirmation that HSBC planned to vacate its tower and move to central London. Sentiment around the European office market in general and Canary Wharf in particular has since improved. Brookfield and Qatar injected GBP300 million into the campus last October and offered a credit facility. That show of commitment is doubtless one reason why bonds issued by parent Canary Wharf Group Investment have rallied.
Against that backdrop, Canary Wharf has raised GBP1.5 billion of new and refinanced debt this year, dealing with substantially all the secured loan maturities that were looming in 2024 and 2025. It’s also seen financial institutions Barclays and Morgan Stanley extend their stay.
Half-year financial results showed a deceleration in the declining worth of the real estate portfolio, now valued at GBP6.7 billion. The office segment — the key worry — was GBP4.3 billion of that, barely changed from the end of 2023. The net asset value of the company was GBP2.9 billion, down from GBP3 billion.
Of course, one should take the overall property value with a pinch of salt. Could the company liquidate its holdings at the numbers attributed to them in the accounts? The office market remains stuck, with few sales to validate pricing. All the same, the printed valuations from independent valuers are helpful for refinancing, and it would be surprising if they took a very sudden leg down from here.
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Things aren’t quite as rosy as they seem. The refinanced sites include the building let to Societe Generale and the European Bank for Reconstruction and Development. Such properties really ought to attract secured lending. Canary Wharf has had to stump up some cash too. Loans are made at a percentage of a building’s value, so as office valuations have fallen, so too has borrowing capacity.
Nor are the lease extensions a free lunch. Canary Wharf agreed to contribute to the refurbishment of Morgan Stanley’s office. This drain on cash is unhelpful when the company is also rightly investing in diversifying away from offices to retail, leisure and residential space.
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The next humps are a GBP350 million bond maturing in April and EUR300 million ($433.01 million) bond due 2026. While yields on Canary Wharf’s publicly traded debt have fallen, the company says other refinancing options are more attractive than the bond market. It’s received approaches from lenders as well as from potential joint-venture partners.
Unfortunately, there’s no cost-free solution here. Canary Wharf points to GBP1.4 billion of assets, mainly retail malls, that could be offered as security for new loans. Given asset values must comfortably exceed associated borrowings, that’s not as big a number as it sounds relative to the challenges ahead. Another bond, with GBP300 million face value, comes due in 2028. As CreditSights research argues, Canary Wharf “shouldn’t play all its best cards at once” solving the 2025 bond maturity.
As things stand, there’s nothing certain in place for these upcoming bonds to be repaid — and the clock is ticking. Canary Wharf says Brookfield and Qatar have confirmed they “intend to provide financial support” as necessary to enable it to meet its liabilities over the coming 12 months. Thanks to this, the company is deemed a going concern.
For bondholders, it’s a test of nerves. There’s nothing legally binding about the owners’ commitment. When companies have too much debt, the decisive fixes are either to receive a cash injection or, in extreme cases, to restructure their borrowings. The latter can involve pressuring investors to agree to swap bonds for lower-value securities. That’s the situation bondholders at Altice France found themselves in earlier this year, just when they thought things were getting better.
Here, common sense points to Brookfield and QIA writing checks as needed. They have shown they’re good for the money within the last 12 months. Both parents own the Wharf as a long-term asset; it’s not part of a private equity fund with a clock ticking. Allowing Canary Wharf to stumble or get into conflict with bondholders would be reputationally damaging.
The alternative to a decisive fix is to muddle from debt maturity to debt maturity doing whatever is necessary to get over that one hump. It’s uncomfortable viewing. Canary Wharf has gotten by with this so far. But expect that approach to be tested.
Mark Carney is chair of Brookfield Asset Management, which manages Brookfield’s Canary Wharf investment. Carney is also chair of Bloomberg.
Charts: Bloomberg
