Champion Reit is a property trust highly exposed to Grade-A premises in Central with major financial institutions among its tenants. With the impact of the financial crisis, analysts believe rentals in this sector could be under downward pressure. However, the reit's refinancing risk is low since loans are not due until mid-2011, by which time many hope the credit crunch will likely be over. 'Champion's parent, Great Eagle, is in a net cash position, which we believe could provide certain forms of funding if required,' Nomura analysts Paul Louie and Jackie Choy said in a report. Nevertheless, JP Morgan analyst Sunny Tam is more cautious. 'Although we estimate Champion Reit's rental income may fall at a slower rate, as passing rent is still some 35 per cent below the spot level, we believe the key risk for the company is the loss of key tenants, which would cause an abrupt rise in vacancy rates and lead to a possible breach of financial covenants, especially if valuations of investment properties fall sharply,' Mr Tam wrote in a recently published report. As Champion has some debt facilities and convertible bonds with clauses that stipulate maximum loan-to-value ratios of 50 to 60 per cent on mortgaged assets, Mr Tam said he saw a high chance that some of these financial covenants would be breached because of the decreasing valuation of Citibank Plaza. 'While we do not expect a bankruptcy scenario, Champion Reit would still need to find ways to raise funds to pay debts,' Mr Tam said, adding that he expected a debt reduction of at least HK$3.5 billion was required to clear the overhang from breaching some of the financial covenants. While the likelihood of any Hong Kong reit bankruptcy was low, there might be some consolidation among reits, said Milton Cheng, a partner at law firm Baker & McKenzie, who cited examples of recent acquisitions in Singapore, including the takeover of Allco Commercial Reit by Frasers Centrepoint, and the acquisition of interests in Macquarie Prime Reit by Malaysian developer YTL.