Blue City Part 2: The money and the big gamble for wealth

Blue City, aka Al Madina A'Zarqa, is now in financial purgatory as the development company has no money, is in default on its multiple contractual sales targets, and cannot repay the debts as obliged under the bond covenants. And that's just what its Chairman says.

Plus, the 80%+ majority owner of the critical Class A and B secured notes is now the Omani Government.

In Part One, I described who was ultimately accountable, and (in part) how it happened. So how does an ace developer start with 32km2 of beach front land plus almost a billion dollars and end up insolvent a few years later? As you might expect, its a long story. So bear with me.

Where did the money go?
Ah, this is an excellent question. While I'll admit I can't answer in as much detail as I'd like, the numbers below are from official Blue City accounts. Cyclone, Ocean, ASIT, BCI, BCC1 (plus various other companies like BCC2/3/4/5/6/7) are all private companies, some registered in Oman, some in the Cayman Islands. They don't normally have to publish public accounts. Here is the original new legal structure of the various companies (click to enlarge):


The original ownership structure of Blue City as impacted by the completely legal (under Omani law) takeover by Cyclone. Note: (1)The Minor shareholdings are usually to preserve the legal rule that limited companies in Oman must have at least 3 shareholders. (2) Oman's Supreme court ruled in June 2010 that AAJH had to transfer all its shares in Ocean and ASIT to Cyclone in consideration for the sum of US$36,289,213.96, (even though the ruling seems to defacto break the 3 owner rule). "The Supreme Court judgment is final and non-appealable."

Fortunately for us readers, it appears that thanks to (1)the legal requirements upon the bond issuer due to their listing laws in Ireland, and (2)the information disclosure terms of the credit insurance policy, there is a lot of information on the Blue City investor website*, and especially items that pertain to BCC1 - the construction company tasked with delivering 'Phase One' and the effective borrower of that money.

Even in these accounts, unfortunately, I can't see enough forensic detail to completely say where it all went, especially wrt shareholders. But it's a good start.

*Note that the Blue City site has a hidden disclaimer that says it's not happy if anyone reproduces anything on that site anywhere, so please note that none of the information presented in this blog comes from that website. The information on Muscat Confidential was therefore obtained elsewhere in good faith.


First: Getting the money. The loan of $925 million
OK. The 32km2 land at Al Sawadi was sold freehold by the Omani Government to ASIT in return for OR32 million in cash, along with a whole heap of covenants to protect the country (more on these later).

The land at Al Sawadi the Government sold for Blue City. Note the 'extra' 4 -5 km2 of land ASIT had rights to get, but were not included in the loan or Blue City.


The original partners: Mr Ahmed Janahi (AAJH), & HE Anees Isaa Mohamed Al Zadjali and HH Sayyid Haitham bin Tariq Al Said (Cyclone), came up with a plan to develop the land, buy Al Sawadi Beach hotel, and eventually build a new city for 250,000 people. All they needed was a loan to get it all going.

If it came off as planned, the owners of Ocean would net around 15% of the final sales price of $3.1 billion in profit - a sweet $450 million. And that was just from Phase 1 (of 8)! Plus on top of that they had the 'secret' 4km2, probably worth another $200 million, and the utilities company profit, plus Al Sawadi beach hotel, some golf courses and hotels.

They pre-invested in a Phase One Master Design plan calling for around 5200 apartments and villas, 2 golf courses (total 27 holes), a marina, some new hotels and retail; got permission from the Ministry of Tourism to build it as an Integrated Tourist Complex (including a Royal decree), had the Council of Ministers bless the idea, and contracted a big international construction company to build it all for a fixed fee of around 1.8 billion. The sales prices (at around US$2,200 - $2,500 per sq. m) were perhaps pricey, but were less expensive than similar projects in Oman or the UAE.

The company then started with $925 million, borrowed by issuing several classes of "notes" or bonds to mainly Japanese institutional investors, with varying degrees of 'security' (ie, with or without the rights to most of the land) and varying interest rates. The senior bonds were rated above 'junk' by Fitches and Moodys.

The initial mortgage was against 25km2 of this 32km2 of land (see map), with ASIT retaining the right to get the rest later. I do not know where ASIT got the US$83 million in cash to buy the land. Note, a year later this land was independently valued at $900 million, and later was even 'valued' at $1.5 to $2 billion.

There was a $400 million insurance policy against default for the senior notes (which could lead to a whole heap of legal battles going forward). With some of the bonds offering interest rates of 13.75%pa plus a discount on purchase of 0.55%, it all looked great**. Bear Stearns had crunched the numbers, the Omani Government was 100% on board, the management structure included a bondholders rep and real world engineers, what could go wrong? AAJH and Cyclone signed up, as did some investors.
(** As long as they could actually sell the properties, off plan, and asap)


OK, they got the loan. Where did the money end up?
This money from the notes was loaned by Blue City Investments (BCI - the issuer of the notes, sitting in the Cayman Islands) to BCC1 (the borrower, here in Oman) under an intra-company loan agreement, with BCC1 also getting another $5 million loan from then partner AAJH. So BCC1 had $930 million.

Oh, but remember some of the notes were issued below par value (at a discount, so the bankers could book a quick paper profit and get their bonuses I guess), so we'll take off the $3.6 million special price: BCC1 = $926.4 million

Wait a moment, that loan didn't come for free, no siree. All that 'assurance', financial engineering and legal stuff had to be paid for. First, the mysterious Oppenheimer Investments AG in Gnome-land, advisors to Blue City and no relation to the famous Oppenheimers of South Africa/London, took a cool $30.4 million in 'fees'. Oppenheimer is a private company and I don't know where all that cash ended up. Bear Stearns also charged some fees for their good name lawyers and bankers, another $30.8 million worth. And then a heap of other 'advisors' and lawyers needed paying too, so that's another $11 million (including $400k for Bank Muscat). Leaving BCC1 = $854 million.

The interest rate of the senior debt was linked to LIBOR + a margin. To make sure this rate couldn't get too high, Bear Stearns was generous enough to cap the interest rate Blue City would be exposed to at just 5.7%pa for the small consideration of $23.9 million upfront. What a deal!

Oh, don't forget that wonderful AXIS insurance policy securing some $400 million of the debt (and ensuring the non-junk bond rating the Japanese needed) had a premium to be paid of course, just $31 million (oh, and putting the future premiums of $26 mill in reserve to make sure they would be paid). Down to BCC1 = $773 million.

Quite a bit of this remaining money was then 'loaned' back to BCI to hold in various escrow 'reserve accounts' at Bank New York Mellon to ensure those initial interest payments could be made. That was another $384 million deduction. (In mid 2009 there was still almost US$290 million left in these accounts, BTW.) So BCC1 now = $390 million.

That original Master plan bullshit development design and fancy artwork needed paying for too. AAJH's people had done that, at an invoiced cost of ... $72 million. So they were paid. But, it also seems likely (and this is speculation on my part) that the strange junior Class D notes worth $70 million were purchased by AAJH by agreement to offset these Masterplan Development Design fees paid to AAJH. But it's still a cheque out the door, signed by Chairman Anees. So now BCC1 = $317 million.

Whew! This borrowing money business isn't cheap! When are we going to actually build something - I thought this was a bloody real estate development? I hear you scream ask? Fair enough. You're right, the builders need paying too.

We now have to pay the upfront payment to the contractor into another set of escrow accounts. This enables AECO to buy things and get stuff going (like camps and equipment), knowing they will be slowly paid off for each invoice they get approved as they end up finally with a 1.8 billion development cost (fixed price remember). It also acts as a sort of buffer of cash if things go wrong. Enough to allow, say, the mortgagees to get stuff finished as required. That's another $131 million please. And lets buy some 'project insurance' too while we're at it, a snip at $2.7 million to Al Ahlia. BCC1 = $184 million.

And we have to 'capitalise' these future BCC2/3/4/5/6/... paper companies owned by ASIT to be ready when the cash from the eager buyers and those future Blue City phases really start to flow, so that's another $4 million into the banks. BCC1 = $180 million & change.

That was all BCC1 had left of that $930 million when it started Blue City back in late 2006. And remember this was the plan upfront, in black and white.

The funding structure for BCC1 as presented before the project was even financed.


Of that remaining money, $20 million was held by Bank NY Mellon in yet another escrow account to pay for the promised Al Sawadi Beach hotel, once purchased by ASIT (although it never was). BCC1 = $160 million.

$50 million was deposited with Bank Muscat locally. Signing authority was with Anees Al Zadjali (Chairman), Ahmed Janahi (Board Director), and Prof Fari (CEO) to start paying for things like parties offices and staff. The remaining $110 million was also with Bank NY Mellon to be dished out for construction bills advised as kosher by the board of BCC1 (where the bond trustee had a nominated member to look out for their interests, Mr Willem De Roo) and BNYM technical advisors, Hill International.


Clear Sailing: Full steam ahead!
And so it began in Jan 2007. Everything was looking great.

The original estimate from Bear Sterns was that Blue City 1 would only get their bank accounts down to $20 million (in the black). The ASIT shareholders still had heaps of money left from all the fees and insurances (the $160 million), a load of great land all freehold, Government support signed in contracts, and a fixed price contract to build it all. All they had to do was sell some 5000 apartments and villas by the sea that didn't exist yet. How hard could that be?

The Blue City project was underway. Loads of money in the bank, borrowed from overseas investors. The owners of Ocean & ASIT were close to making a half a billion dollars in profits. "Trebles all round!"


Blue City in early 2007.


Things then started to go tits up

In Part 3, how the Blue City project was driven to bankruptcy by its owners.