Summit warns of likely breach of LTV covenants

AIM-listed German commercial property investment company Summit Germany said on Thursday that it is likely to start renegotiating the financing term of its credit facilities as it risks breaching loan-to-value covenants due to a sharp fall in the value of its property portfolio.

'In the current difficult climate when property capital valuations are coming under severe pressure, most of our debt facilities are currently close to the upper limit of their respective LTV covenants. Should market conditions not improve, we expect to enter into a dialogue with our creditors,' the company said. Its total debt stands at EUR 742 mln, it added, with a remaining term of approximately 5.3 years and fixed average interest rate of 5.4% per annum.

The company owns a portfolio consisting of 928,000 m² of net commercial space and generating an annual net rent of EUR 65.3 mln. The average length of its existing lease agreements is 6.5 years. Its tenants include major firms such as Deutsche Telekom and a number of German government entities, but also smaller companies which are expected to experience 'some difficulty' in the current recession.

To help improve its financing position, Summit said it will postpone or suspend the distribution of dividends until its financing situation and cash flow needs become clearer.

John Lamb, chairman of the company, said: 'We are in a difficult period in general and in the real estate business. We are faced with risks of decreasing income due to financial difficulties of tenants, declining demand for properties and decreasing valuations resulting in potential breach of LTV covenants.'

Accountancy firm Ernst & Young warned this week that distressed sales are expected to rise in Germany this year, with investment volumes in 2009 forecast to drop by as much as 23% on 2008 levels. The firm, which quoted its annual survey of German real estate companies, funds and banks, said that 98% of respondents stated that it expected a 'significant increase' in distressed sales in the country.