The steep discount at which the banks may be forced to sell the debt would, in effect, value Canary Wharf, which cost more than pounds 1.5bn to build, at pounds 60m. Brokers in the debt market believe the loans may be worth less than 10p in the pound.
The debt sales could force Canary Wharf into liquidation by undermining attempts by Ernst & Young, the project administrators, to raise another pounds 200m from the banks to keep the development going. It could also jeopardise plans to extend the Jubilee underground line to Canary Wharf.
It is understood that the European Investment Bank, the development bank based in Luxembourg, has agreed in principle to lend London Underground pounds 98m.
However, the deal is subject to the banks agreeing guarantees and security for the loan, which would form part of the pounds 200m total expected from the banks.
Gary Klesch, whose Klesch & Co broking house is a leading player in the distressed loans market, is understood to have been retained by at least two of the banks to sell their loans.
They would be the first sold by Canary Wharf lenders, although there has been active trading in loans to Olympia & York, the developer and former owner of Canary Wharf, whose bankers recently agreed to an dollars 8bn restructuring plan.
Mr Klesch would not say which banks were interested in selling but speculation in the market is that they are drawn from the two US banks, Citibank and Chemical, and three Canadian banks, National Bank, Royal Bank and Canadian Imperial Bank of Commerce. He is understood to have warned the banks that they should be prepared to accept less than 10p in the pound for their loans. This is half the market price of Brent Walker debt, which trades at 18p in the pound, and a fraction of the price of Maxwell Communication Corporation debt, trading at 42.5p.
However, the price would be higher than that offered last year by a consortium including Paul Reichmann, the head of O&Y. Early negotiations involved the consortium asking the banks for money to take the project off their hands.
If the loans are sold at less than 10p in the pound, this will have implications for the profits of the two British banks with large exposures to Canary Wharf - Lloyds and Barclays - which have each lent about pounds 60m.
They are understood to have made provisions of about pounds 25m each against their loans and may have to write them off in their results next month.
The most likely purchasers would be US vulture funds, which specialise in 'bottom fishing' for distressed assets. They may be unwilling to put up further finance, forcing Ernst & Young to liquidate Canary Wharf and sell individual buildings to the highest bidders.