I think readers will find it pretty consistent with the story you've been getting from Muscat Confidential over the years. Enjoy!
The original Blue City Phases as planned. 'Phase zero' (just building a hotel, a few villas and apartments plus an 18 hole golf course) was ommitted...Blue City: What Happened?
On April 21st a story broke that former majority owner, AAJH, of the stalled Blue City project had found a new partner in Qatari investment company Bin Muhanna Holding Group. The two firms announced their aim to “restore confidence in the project” and approach investors to revive it and realize development objectives.
Blue City was meant to be Oman's biggest real estate undertaking. USD 925bn was raised in a November 2006 multi tranche bond issue for the project’s first phase, however the project crashed on the back of dismal sales and the bonds defaulted. A restructuring offer remains elusive and the company says it has “no reasonable expectation to meet debt payments when due.”
Prior to the default the minority (Omani) shareholder edged out the majority (Bahraini) partner. The Omanis brought USD 879.1mn in equity in the form of land (according to a CBRE valuation) to the deal and the Bahrainis brought USD 100mn of equity and made the USD 925mn bond raising possible. They also would provide much of the design and development. Yet the Omanis (Cyclone) had only a 30% share of the project while the Bahrainis (AAJH) had a 70% share. Months after the bond issuance minority holder Cyclone brought suit against majority holder AAJH of illegally acquiring the majority stake from third parties. It lost that case but appealed and won an injunction against AAJH. Cyclone is believed to have benefited from an influential owner (a Royal Minister holds 50% of Cyclone). The dispute is now in the Omani Supreme Court and a decision is impending.
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The inclusion of the new Qatari partner has added upside to the bonds. It makes revival of the project possible through the financial and legal leverage of the Qatari partner. The Chairman of Bin Muhanna Holding Group, Dr. Najeeb Bin Mohammed al Noaimi, is both a former Qatari Minister of Justice and a defense attorney for Saddam Hussein. He has a reputation for championing various legal causes in the Arab world. If his presence causes an AAJH victory in court then the project would benefit from better management and new capital.
If the Omanis win the Supreme Court case then their claim stands, but they might still consider reconciliation. In exchange for Qatari capital and Bahraini know how the Omanis might restart the project after a renegotiated shareholding. Ownership shares might converge towards 50/50 instead of 70/30.
Downside for the bonds stems from an Omani victory, no reconciliation, and a failure of the bond insurance policy to pay out (the current concern). Recovery will also decrease according to tranche seniority and be minimal for the C & D tranches. INSOL, an association of turnaround lawyers and accountants, states that the average recovery rate in MENA bankruptcies is 30% as opposed to 55-60% in developed countries What will mitigate that here is whether an insurance policy on the first tranche is still in good force.
Blue City bond holders are supposedly secured by 25sq km of the project area, which was valued by CB Richard Ellis at USD 879.1mn in 2006. However this land was gifted by Oman to the project and it is improbable that Oman would hand over this real estate to bond holders. Hence we exclude it from a recovery valuation. There is also a series of cash reserves outside Oman and in the custody of the Security Trustee, the Bank of New York, and theoretically this cash should be available security to Bond holders.
The A1 tranche’s principal is completely (but not unconditionally) insured by Axis Capital, who refused to provide figures but stated on its 4Q09 conference call that it was comfortable its reserving provision for the Blue City project would be sufficient to bring finality to its involvement in the bonds. On the 25th March 2010 downgrade of the A1 tranche Moody’s stated there was a breach of warranty of the credit insurance policy. It is unclear if the insurance policy is still in force but Axis has seemingly provisioned for a loss and so we assume a recovery where Axis makes good on half of the insurance.
With these considerations in mind: the security land is off limits, the cash reserves are in good form under Bank of New York’s custody, a 3 year recovery process, and yields of 25% the A1, A3, B1, C, and D tranches have present value recovery values of 51, 28, 14, 0, and 0. The price of the bonds should go higher than recovery in the case of the project’s revival.
In conclusion we believe the recent developments bode positively for the bonds but we would not recommend going beyond the A1 tranche as there is still substantial risk in a recovery situation. The expected recovery of the bonds should be best for the A1 tranche with value hinging on the size of the payout for the insurance policy and the integrity of the cash reserves at BoNY.
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