U.K.-based Canary Wharf Group's disclosure of options extended to some tenants, allowing the tenants to put 625,000 square feet of space back to the group. This caused a flurry of concern over the potential impact to bondholders of the Canary Wharf II securitization, which is backed by the cash flow of the leases.

The term of the leases allow tenants -Barclays, Skadden Arms, Lehman Brothers and Clifford Chance - to give the space back for a period of five to 10 years, according to Morgan Stanley. This means that these companies are essentially subleasing the space back to Canary Wharf, which then would become responsible for the rent on the property paid to the original tenant and then passed through to the rental accounts.

"These put options do not affect the contractual payments due," explained one analyst at Merrill Lynch. "The tenants still have the same obligations to pay the full amount of the contractual rent, which then flows through to pay the debt service on the notes." Market analysts assured that by subleasing the space back to Canary Wharf through this put option, no extra reliance is placed on the liquidity facility to service the debt in the Canary Wharf II transaction.

However, market concerns continue regarding finding a new tenant should Canary Wharf be placed in the position to take back the space. These worries have arisen from a declining market that has seen the number of empty office properties rise. More space on the market would only add to that aggravation, and has already driven pricing on the Canary Wharf II deal wider.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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