Last week the Omani Government bought out the senior debt bonds or 'notes' of Blue City after the UAE investment company threatened to exercise their right to take the land, as reported in The National:
Oman now owns Blue City project
Last Updated: Apr 1, 2011
The fate of the troubled US$20 billion (Dh73.45bn) Blue City project is now in the hands of the Omani government after its sovereign wealth fund acquired the debts of the developer.
Onyx Investments, a company fully owned by the Oman Investment Fund (OIF), bought from Essdar Capital Managers nearly all of the class A1 and A3 notes issued by Blue City, the companies said.
Essdar, an investment company in Dubai that is part-owned by members of the Abu Dhabi and Dubai Royal Families, bought $655.5 million of the debt at a steep discount last year as the Blue City project faltered.
Essdar's original plan was to use the power designated to the class A bond holders to restructure the project. When that failed because of legal complexities, Essdar planned to foreclose on the project and sell the land. But in the end it chose to sell the debt to a third party.
Neither Essdar nor the OIF would comment on the sale price or plans for the project now that it belongs to the Omani government.
Essdar did claim to be happy with the transaction, so presumably made a tidy profit on the deal. I'll try to explain what happened. It's a long story, so this is part one.
The Blue City project, aka Al Madina A'Zarqa, will be very familiar to regular readers of Muscat Confidential. Over the years, it has been a topic of regular posts. Some of the comments sections were the most fun, with outsiders noting the likely failure and iffy dealings even before the regional real estate meltdown, while Blue City apologists (and probably anonymous employees/management) kept abusing us with ad hominem attacks and saying everything would be great.
We now know the result of all that hubris and greed: bankruptcy, default on almost US$1 billion in internationally sourced loans and contractor debts, a deserted & hardly completed building site, the local people of Al Sawadi disenfranchised from their land, and in the end well over a half billion dollars from the Oman Government savings account used to buy out the class A bonds that held the mortgage on the land.
It is Oman's largest bankruptcy ever. 2% of GDP, nearly 10% of net annual oil exports, was lost, in the process damaging Oman's international reputation as a place of investment opportunity (or perhaps cementing our growing reputation as a place of corrupt and unethical dealings plagued by insider trading?).
I'll try to address a few obvious questions:
Who is responsible?
How did it happen?
Where did the money go?
What does the future hold?
Who is responsible?
The answer is easy: The two 50/50 Omani shareholders in local company Cyclone LLC, the ultimate owner of this disaster, who have been in total control of the project from the beginning:
HE Anees Issa Mohamed Al Zadjali was one owner, and as Chairman of the various local companies had effective executive control over the 'development'. He is the son of Issa Al Zadjali - the owner of local newpapaper Times of Oman - and gains his 'His Excellency' title by virtue of being the Honorary Consul of the Republic of Lithuania.
His Highness Sayyid Haitham bin Tarik Al Said, Minister of Heritage and Culture of the Sultanate of Oman (and the Sultan's cousin) is the other owner. HH kept his Ministerial position in the recent reshuffles and reorganisations of the Ministers following the protests.
Neither of the owners had any significant experience of property development.
HH Sayyid Haitham Al Said, as a Minister and member of the ruling Al Said royal family, certainly brought the support of his cousin, the Sultan, and presumably arranged for the purchase of the land from the Government, the various guarantees and permits required, as well as the promise of the required infrastructure that would be needed to link Blue City with the rest of the country - roads, power, water etc. And let's not forget all the eventual Government expenditure that would be part of the vision to attain critical mass, building and funding public hospitals, schools, ROP and other Government services.
It's not clear how Anees Al Zadjali ended up as co-owner in charge of a $15 billion real estate development project. He could bring some free press, as editor and partner of The Times of Oman media group, and he has various other minor business interests in media and agriculture. Due to his involvement in the Blue City project he incredibly even made the UK Times' 2007 list of the Twenty-five shaping tomorrow’s world of Middle East business. Unfortunately the headline probably still holds true, although it's not the sort of future that was being envisioned in 2007.
How did it happen?
The more complex answer shares the blame out somewhat, but doesn't take away the accountability of the two above. The now defunct Ministry of National Economy was involved, naturally, as was the Ministry of Tourism. Bank of New York Mellon were supposedly providing oversight on behalf of the bond holders. The bond purchasers themselves (apparently mostly Japanese investors) were enticed by the nice returns on a seemingly foolproof deal, administered by Bank NY Mellon and secured by a mortgage on most of the land.
Instigator of the project, Bahraini developer Mr. Ahmed Abubaker Janahi through his holding company AAJH, apparently arranged the bonds through a shady Swiss outfit and committed to a whopping $25 million fee for the $925 million in bonds. AAJ also set up the project's vision, got the original master plan drafted, and essentially enabled the project's initiation. He was subsequently bullied off his 70% piece of the project by then 30% shareholders Cyclone, and despite a series of lawsuits, ultimately lost. Local bank Bank Muscat agreed to provide mortgages to purchasers. Various international consultants took their large up-front fees to agree to design unbuilt golf courses, manage non-existant hotels, and even Sir Norman Foster's company did a massive redesign once Cyclone has taken over (as persona non-grata AAJH had done the original design).
The favorite scapegoat of those involved for the project's abject failure will certainly be the regional collapse of the Middle East Real estate market in late 2008, especially for such mega 'off-plan' integrated developments. Certainly the pre-crash bubble environment was infectively optimistic. Anything seemed possible, even ultimately hallucinogenic-ally ambitious and uneconomic projects like Blue City (touted at the time at an eventual $20 billion, Blue City was by far the largest proposed development in the entire region).
I don't buy that excuse for a moment. The project was mis-managed from the start, and hundreds of millions of dollars in borrowed money spent like there was no tomorrow. The Omani partners, once the bond was sold, instead of getting on with the project and their 30% share of it immediately started trying to take all of it, presumably with visions of their 100% cut of the profits on $20 billion in their eyes, even before they started breaking ground. This not only delayed the project by over a year, so that opportunities pre-crash for lots of sales were lost, it wasted more money in redesigns and continuing expenses. The project then slowly and expensively spiraled into bankruptcy.
Anees Al Zadjali, as co-owner and Chairman, surrounded himself with a very highly paid entourage of sub-par real estate people, and of course had no significant real estate development experience himself. Eventually, experienced American developer Richard Russell was lured from the UAE (perhaps not difficult to do as Dubai had collapsed) to take over as Managing Director and CEO. I think Richard did the best he could. By the time he was there, and given the penchant of Anees for micro-management, the project was already doomed, at least in terms of the original scope. Overhead costs were out of control.
Spin - always Blue City's forte - began to be the only thing the project team was good at; constantly using the name of His Majesty and 'his vision';
Disputes happened with almost every contractor and subcontractor, in a textbook example of a failed execution of relationship management. Project management consultants Bovis walked off and sued. Engineering consultants ACE ended up appealing to Bank NY Mellon about being unpaid for over $4 million in fees, and they walked too. AAJH, someone who at least had some experience in developments of this scale, continued to seek recompense in the Omani courts and failed, and even offered to come back in for 50/50. His offers to help rescue the project were spurned by Cyclone.
In desperation, advance funds paid to the contractor that should have been reserved until the end for building phase 1 apartments and villas were redirected to try to build a hotel in time for the Asian Beach Games in late 2010, which it seems the Management promised to the Omani Government to try to regain some credibility. This blew the last of the available money, as Bank Mellon turned off the taps following repeated failures of BCC1 to meet contractual sales targets and Cyclone declined to inject more of their own money to meet their obligations.
Photo: Blue City is now just a wasteland of partially completed concrete buildings and foundations. Not much has changed since this was taken in late 2009.
The Asian Beach games went ahead anyway. The hotel was never built, finally reaching just 26% completion (see photo), as detailed in a terse letter last month by Hill International, appointed by Bamk NY Mellon as the noteholders' technical advisor to the project since 2007:
From Hill International (UK) Ltd
TO: Blue City Company 1 SAOC
11 Mar 2011
... Notwithstanding the above, according to the work schedule that was adopted under the unapproved Addenda, BCC1 used a significant part of the balance of the Advance Payment towards funding design and construction works of the Amphitheatre Hotel, a non-residential, not sold, non revenue-generating for debt service, section of the development. We understand that this was due to a promise of BCC1’s/ASIT’S Chairman to higher Omani officials to have the hotel operational during the Asian Beach Games that were to be held in Oman in December 2010.
Despite depleting the balance of the AP, construction of the Project stopped anyway later on in the absence of additional funding being secured by BCC1. The Contractor suspended works in December 2009, with construction works at the hotel reaching a 26.5% completion stage (according to the Contractor’s progress reports)...
The full letter is a very interesting read.
Blue City management presented a 'restructuring' proposal to the bondholders (of the senior notes, by then mostly owned by the UAE investment vehicle ESSDAR) in August 2010. You can read the full thing here.
In their presentation, the failure of the project is blamed on pretty much everything other than Blue City management.
The project is facing difficult times on account of:
• Excessive and expensive debt burden being borne by the project
• Onerous debt covenants
• Inflexible construction contract
• Global financial meltdown that has severely affected regional property market
• Continued global economic weakness affecting property off‐take/investor confidence
• General negative publicity surrounding the project (Ratings, Shareholder dispute)
• Master plan changes, design changes and delayed sales releases
Among other things, the Blue City team proposed a cunning plan consisting of selling off the hotel(s) and most of the rest of the land to get some cash to finish a reduced Phase 1 development. Their proposal included debt write-offs, re-negotiating the the contract with the contractor, dumping various oversight entities such as Fitch(!), releasing the company from agreed sales obligations, zero interest payments, and even the help of the note holders to find people willing to buy the properties.
Notable by its absence was an offer to change out the senior management and governance structure of the project, given that most of the above list was agreed and executed by ASIT. After all, this situation was hardly the fault of the outstanding Chairman HE Anees Al Zadjali.
The explicit threat to the note holders was that the Government would cancel the concession and they'd be lucky to get anything. Not surprisingly, the UAE decided instead to sell the notes to the Omani Government and book a tidy profit.
Can you blame them?
So now the Government is in the driving seat, paying good money to avoid an embarrassing foreign foreclosure on the land that was theirs to start with. What a mess.
In the end, Blue City's shareholders started with over 25km2 of almost free land in one of the most beautiful parts of Oman's coast, full support from the Government and $900 million in cash. Within a few years they ended up with some piles of concrete and a trail of debts, broken promises and litigation.
In part two: Where the money went, and the way forward.