Spitalfields may soak up fresh equity

BICC, Costain Group and London & Edinburgh Trust face the prospect of having to inject fresh equity into Spitalfields, the 12-acre site they are jointly developing east of the City, following discussions with banks about the roll- over of pounds 165m of debt.

The City also fears that the companies will have to make large provisions against the development, a pounds 1bn scheme to create 1.2 million sq ft of offices, shops and houses, in their 1992 accounts.

The three partners have invested pounds 65m in the scheme, although only pounds 10m, representing shares in Spitalfield Holdings, is included on their balance sheets, with the remainder as off-balance sheet debt.

Discussions on the roll-over of the debt are due to be completed in the fourth quarter of the year, but it seems likely that the banks will refuse to renew the full sum. That means the three partners will have to subscribe for additional shares in the development.

The slump in property and the chronic oversupply in the City office market - where it is estimated that at least 20 per cent of the available space is unlet - means that the Spitalfields site would be unlikely to fetch anything close to the pounds 195m invested. 'It is questionable whether the site has any value as an office site, so it could only be valued as a car park or a warehouse,' an analyst said.

But Peter Zinkin, director of planning and development at BICC, said the banks were less concerned about the value of the site than about the ability of the three partner companies - which guarantee the loans - to service the debt.

While that is unlikely to present problems for BICC - whose total gearing is less than 50 per cent - or LET, which is owned by the Swedish company SPP, Costain may find it more difficult to persuade the banks to renew the loans. Its accounts for 1991 show debt, including pounds 38m of convertible capital bonds, of pounds 258m, more than 80 per cent of shareholders' funds, and analysts expect it to make less than pounds 10m pre-tax profit this year.

These financial pressures will be eased by the proposed flotation of up to half of its Australian mining subsidiary, which is estimated to be worth at least pounds 130m. But Peter Costain, chief executive, said the group's forecasts for the year assumed an injection of equity into Spitalfields. The three parties are committed to making equal contributions. He added that provisions would be considered at the year-end.

An injection of equity would not answer all the City's concerns about the development. Some analysts believe there will be insufficient demand to justify the scheme until well into the next century. But Mr Zinkin said: 'It was always going to be built over a long period.'