Canary Wharf Group, the operator and developer of the London financial hub, has cut its long-term debt by buying back £120m of mortgage bonds at heavily discounted prices, in a move that demonstrates the lack of liquidity in the debt markets.
Canary Wharf Finance II, a securitisation unit set up by the operator to finance its investment in the Docklands development, has paid £35.5m to repurchase mortgage securities with a face value of £119.8m.
The substantial discount reflects the lack of liquidity in the debt markets and just how desperate hard-pressed hedge funds and other bondholders are to generate cash. The transaction by Canary Wharf Group could lead to other property operators trying to buy back their own debt at similarly heavily discounted prices.
Investors have given a wide berth to mortgage securities, which are perceived to be difficult to put a value on, amid the credit crunch and the crisis in the global property sector that started in the US sub-prime market.
For the principal amount of £119.8m, Canary Wharf Finance II has bought back the debt at the discounted price of 21.6p in the pound for the BBB-rated notes, 30.3p in the pound for A-rated notes, and 46.8p in the pound for AA-rated notes.
The 30-year Canary Wharf Group bonds were issued in April 2007, close to the top of the UK property market. Canary Wharf Group has about £2.5bn of bonds in issue. The investment banks Morgan Stanley and Lazard managed the deal.
Separately, Songbird Estates, which is a 61 per cent shareholder in Canary Wharf Group, said last month it was close to breaching its banking covenants and was mulling its refinancing options to safeguard its future. The potential covenant breach relates to a £880m loan that it must repay to Citigroup in May 2010.