Sept. 16 (Bloomberg) -- Lehman Brothers Holdings Inc.'s London landlord, Songbird Estates Plc, said rent payments for its largest tenant in the Canary Wharf financial district are insured by American International Group Inc.

Songbird today fell the most since June 2007 and the shares have lost 15 percent of their value since the Wall Street firm filed for Chapter 11 bankruptcy protection yesterday. AIG, the largest U.S. insurer, is trying to raise cash to keep afloat.

Lehman accounted for 15 percent of Songbird's revenue last year. Songbird shares have slumped 47 percent this year on concern the slowing economy and tighter credit will lessen demand for office space. The value of offices in the City of London, the U.K. capital's main financial district, has plunged almost 27 percent since peaking in July last year.

A default by Lehman would require AIG to pay up to four years of rent, Songbird said in a statement today. Lehman pays 41 pounds ($72.82) per square foot annually for more than 1 million square feet (93,000 square meters) at 25 Bank St. The rent is set to rise to 51 pounds a foot in November. On that basis, AIG's maximum liability could be around 200 million pounds.

The downgrade in AIG's credit ratings will force the insurer to post collateral or have its commitment ``guaranteed by an entity with specified credit ratings,'' Songbird said.

AIG fell 34 percent in New York trading after the insurer's credit ratings were cut, threatening efforts to raise funds to keep the company from failing.

Shares Sink

Canary Wharf Group, which is 61 percent owned by Songbird, expects talks with Lehman's administrator to start shortly, the company said. Songbird is controlled by a group including Morgan Stanley, British Land Co. and New York investor Simon Glick.

Songbird fell 9.9 percent today to 93.5 pence in London trading, valuing the company at 424 million pounds. Company Secretary John Garwood declined to comment.

Lehman's rental, including 148,000 square feet it subleases to other tenants, was 41.9 million pounds last year out of Canary Wharf Group's rental income of 275.3 million pounds. The 1.023 million square feet Lehman leases is 13 percent of the space owned by Canary Wharf Group, according to Songbird's annual report.

Canary Wharf Group owns 16 of the 30 buildings on the 93- acre estate in east London's Docklands. Barclays Plc, the U.K.'s third-biggest bank, leases 970,000 square feet from the group.

More Space

Developers are adding about 4.2 million square feet of offices in the City this year, the biggest block of new space since 1991 when almost six million square feet was built, just as the credit crisis roils financial firms and the economy. A further 4 million square feet is due in 2009 and 2010 combined and developers have yet to sign up tenants for that space.

The Lehman building is financed as part of a 2.55 billion- pound securitization structure, Canary Wharf Finance II Plc, said Songbird. Holders of the secured bonds have no recourse to Canary Wharf Group or its investors, the statement said.

Lloyds TSB Group Plc has provided Canary Wharf Finance II with 300 pounds of liquidity it can draw on in the event of a cash flow shortage under the securitization.

The Morgan Stanley-led group bought Canary Wharf, a 30 minute taxi ride east of the City, in 2004 for 1.7 billion pounds after a yearlong tussle with Brascan Corp., now owned by Brookfield Asset Management Inc., and Canary Wharf founder Paul Reichmann.

The vacancy rate at the time of the takeover was 11.7 percent, compared with 0.4 percent in the buildings still owned by Canary Wharf Group at the end of 2007.

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

Last Updated: September 16, 2008 14:13 EDT