Jeremy Warner: Canary Wharf owner teeters on the brink

Outlook Those with long memories will recall that Canary Wharf, the London Docklands development which is home to some of the City's largest investment banks, went spectacularly bust in the last recession. With the economy once more contracting fast, and the financial services industry contracting even faster, is it about to go under for a second time? Perhaps oddly, given the meltdown in investment banking and London commercial property values, this actually doesn't seem terribly likely. The complex is close to fully let, there's cash on the balance sheet, there's no speculative development going on (new offices for which there are no tenants pre-signed), most existing tenants are on long leases, and even the building once occupied by the now-defunct Lehman Brothers looks safe enough. The rent was insured for four years with AIG.

What is teetering on the brink is the company, Songbird Estates, that owns 60.8 per cent of Canary Wharf. Songbird is the result of an only partially successful, highly leveraged bid for Canary Wharf, led by one of the development's major tenants, Morgan Stanley, back in 2004. Even for shareholders in Songbird, the situation isn't that bad, as they would already have had their money back and some in the form of dividends had they been in from the start.

All the same, the outlook for their remaining equity doesn't look great. Yesterday Songbird became the latest property company to admit it was close to breaching its loan covenants. Like all the others, Songbird has been caught by "loan-to-value" conditions which when established looked extraordinarily conservative. Nobody thought it remotely possible they would be breached. But such has been the extent of the commercial property market correction – the worst peacetime crash in 90 years, according to Francis Salway, chief executive of Land Securities – that they are now virtually certain to be broken some time later this year.

There's only one bank involved, Citigroup, with £880m in outstanding loans. These come up for renewal in May of next year in any case, so even if Songbird somehow manages to stay within its covenants, it will have to refinance soon.

Citigroup, now instructed by the US government to prioritise American over international lending, almost certainly wants out, but who is going to take on that sort of debt in these markets, even when underpinned by an asset as potentially lucrative as Canary Wharf? The equity has sunk so low that raising the necessary through a rights issue is now out of the question.

I say potentially lucrative, but of course most of Canary Wharf's tenants are banks and related service providers, all of which are shedding staff, and therefore office space, as fast as they decently can. If you believe the more outlandish predictions, the concrete canyons of Canary Wharf will soon be reduced to a post-apocalyptic urban desert of tumbleweed and decay, where Will Smith-like figures patrol the streets with gun and dog.

When Canary Wharf first went bust in the early 1990s, there were similar questions about what on earth you did with a development for which there appeared to be no tenants. One idea, seriously explored and not entirely ridiculous, was that the civil servants of Marsham Street should be moved down there. If all else fails, there's always the Financial Services Authority, which is already one of the Wharf's largest tenants. Regulation seems to be the only growth industry left in the City, even if there may soon be nobody left to regulate.