Thursday, May 13, 2010

An independent assessment of Blue City: Broker analysis

As the 'debate' continues in the comments section of a previous post on Blue City and amidst the various claims and counter claims, I thought it timely to post this independent assessment of the project by emerging markets specialist BCP Securities, a fully licensed U.S. investment bank headquartered in Greenwich, Connecticut. They did the analysis to provide information to clients (and potential clients) who want to trade the bonds.

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.

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.

This document is for information purposes only. Under no circumstances should this document be used or considered as an offer to sell or a solicitation to buy the securities or other instruments mentioned in it. The information in this document has been obtained from sources believed reliable, but BCP Securities LLC makes no representations concerning the truth or accuracy of the content or substance of this report, or of the future market value of any securities, notes, or private claims mentioned within. Opinions expressed herein constitute our opinion as of the date published and are subject to change without notice, and BCP Securities LLC makes no representations that it will endeavor to update its analysis upon any change of circumstances. All views expressed accurately reflect the research analyst’s personal views about the subject, securities and/or issuers and no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst. The products mentioned in this document may not be eligible for sale in some states or countries. BCP Securities LLC, its affiliated companies, and/or its officers, directors, or shareholders, may from time to time have long or short positions in the financial instruments of the company mentioned in this document, or may serve in an advisory capacity with respect to such instruments.


  1. UD,

    Going through the information provided, I have only one small comment which is about the project land.

    In the report it says:
    "The Omanis brought USD 879.1mn in equity in the form of land"

    but in Bond prospectus in page 36 under the Principal Term of the Development Agreement (a) Sale and Purchase of Government Owned Land, says:

    "The Government has agreed to sell 32sqkm of the Government Land to ASIT for the sum of OMR 32,000,000 ($83,200,000) (the Land Price). On 14June2006, the Government transferred 25sqkm of the Government Land to ASIT in consideration of the Project Sponsor's payment of OMR 32,000,000 consideration in cash""

    So the land did not come in a form of equity by the Omanies, but it was purchased by the project partners..

  2. and would one assume that the 32million came from the 100million put in by the Bahraini's ? In which case what was the equity from the Omani side ?

  3. So, what about the remaining 7sqkm of land that the Government agreed to sell to ASIT? And is there some later clause in the Principle Term of the Development Agreement that specifies what happens to this "sold" land if the project fails or is downsized? No Omani govn't official thought of that possibility - or did they have reason not to care?


  4. The bahraini party are the company that created the blue city project and financed the project by raising the bond. then came along the omanies with the muscles and influence of their royal partner and pushed out the bahraini's to manage the project to failure and announce that the company would announce bankruptcy and their are not able to pay the bond back. And then the bahraini's try to save the project and the Bond and fix what the omanies have done.

    why on earth they pushed away the bahraini's if they were incapable? but it shows muscle is stronger in oman rather than brains!


  5. So basically this note says if:
    - you believe in the Omani courts,
    - you believe the land valuation,
    - you have elephant sized balls,
    - and have some money that can earn a 25% return but you might not ever see again,

  6. Looks like India and Oman are working together on this.

    Did Omani carry out Mumbai recce for 26/11 before Headley?

    David Coleman Headley was not the only 'foreigner' deployed by Lashkar-e-Taiba for organizing the 26/11 attacks in Mumbai, ongoing investigations reveal. In a fresh twist to the 26/11 attack investigations, credible evidence is emerging that some of the logistics for the LeT plot may have come from the Gulf region.

    According to dependable sources in the security establishment, an Omani national, Abdul Aziz al-Hooti aka Ali, may have played a major role in assisting LeT execute the operation. As of now, the investigators believe that Ali provided some of the SIM cards used in the Mumbai attacks by the 10 terrorists who landed in Mumbai on November 26, 2008. Ali is currently in the custody of Oman authorities for plotting to carry out terror attacks in Oman.

    A source in the Indian security establishment told TOI that they were in touch with the Oman authorities for further cooperation.

    Ali is an Omani citizen married to a Chinese woman, but has strong links in India. His mother is from the Sangli area of Maharashtra and probably has wide contacts in the state. Sources said Ali was in Maharashtra for several days just before the attacks. It is not clear where he travelled to, and who all he kept in touch with during his stay in the state. Those details could reveal the local angle to the Mumbai attacks.

    First details of Ali's specific involvement emerged during the interrogation of Sarfaraz Nawaz, a Malayali who was arrested in Oman and is now in Indian custody, for masterminding the July 25, 2008 Bangalore blasts. Nawaz was brought to India sometime last year. Omani national Ali had told Nawaz that he brought at least five SIM cards from Mumbai and passed it on to LeT before the 26/11 attacks.

    However, sources now believe that Ali had far more involvement in the Mumbai attack than just providing the SIM cards. Among the possibilities are, speculated a source in the security establishment, that Ali may have provided the initial recce of Mumbai before Headley entered the scene and that Ali may have also arranged some local logistics help.

    It has always been a mystery to investigators how the 10 terrorists who landed in Mumbai could so well carry out the carnage, on many occasions exhibiting military precision and extreme familiarity far beyond GPS precision and Google Earth. From the very day of the attack, many seasoned intelligence and security experts suspected that the terrorists had local support. Even today, many investigators believe that Headley's recce of Mumbai was not just enough for the execution of the carnage. Revelations on Ali now shed more light on the enormous planning that went into the Mumbai attacks.

    The Indian security establishment now has a far better understanding of the influence of LeT in the Gulf region, and believes Ali was a key operator for the agency. They believe Ali, around 32 years old, helped in the movement of LeT recruits from India to Pakistan for training.

    Among those whose movement to Pakistan Ali facilitated is Fahim Ansari, who was arrested for terrorist activities in India but was recently acquitted in the Mumbai attack case. Ali lived opposite the Royal Palace in Muscat and owns a transport business, Barkat Ali Ikha, Ruwi, which may be partially funded by LeT, sources say. Ali was also into actively recruiting expatriates for LeT from the Gulf region.

  7. Am I getting this wrong or what? It would seem that the Gov of Oman sold (er, umm, gifted) land to Blue City at $83mn, and that 'overnight' it became... $88mn.


  8. Oops. My mistake. That should be $83mn and $880mn.


  9. Dear UD / Bobindubai,

    1 Million Omani Rial for 1 square kilometer; so for 32 square kilometer land, 32 Million Omani Rial was the Land price payable by the Project Company to the Government of Oman. Refer to the signed Principal Agreement dated 26th July 2005 between the Government of the Sultanate of Oman represented by the Minister of Tourism and ASIT. The authors of this agreement were Trowers & Hamlins, Oman and Clifford Chance LLP, UK. On 23rd April 2006, Addendum Agreement was signed between the same parties. It was also ratified by HE Ahmed bin Abdulnabi Macki (Ratified by the Supervisor of the Ministry of Finance, pursuant to Royal Decree No. 48/760).

    Clause 22 of the Principal Agreement re-produced as ready reference. Cyclone / BCC1 please read again. Oh yes, Anton read these facts please.

    Clause 22 - In consideration of the sale of the freehold interest in the Government Land to the Project Company by the Government under this Agreement, the Project Company shall pay the Land Price which shall be paid to the Government in full on completion of the transfer of the Government Land by the Government.

  10. I am getting confused between Omani Al Hooti terrorist helper staying opposite royal place !!! Omanis snatching project from Bahraininis!!!

  11. man we are sick of blue city posts, did they screw your wife or something.i bet it was the zadjali dude.

  12. Lets see... In the BCP Securities report provided by UD it mentioned that the land of Blue city is worth $879,100,000 which was reported as the equity brought in by Cyclone. But I think I clarified to all using the Bond prospectus that the Land was purchased in cash by both Partners for OMR 32,000,000 ($83,200,000). and BobinDubai has rightfully questioned how come it was purchased for a price but reported for another... with a little bit of digging in the Bond prospectus I came to the following:

    In page 154, Under CBRE Valuation Certificate, Scope of Works & Source of information. It reads the following:

    "VALUATION METHODOLOGY; We have adopted a discounted cashflow (‘‘DCF’’) approach to determine the land value of the Blue City development. The industry accepted method, complying with the RICS, is to value developments using the residual method of valuation. Both phase 1 and phases 2 to 10 have been valued using this DCF technique."

    What does this mean?!

    In simple words it means that the valuation was conducted putting into consideration the development that is supposed to be developed on it and not the value of land as a stand alone.

    One might ask himself here are cyclone capable to design a master plan for CBRE "a well reputed land real-estate agency" to value the land at $879.1mn??? In my humble opinion, my verdict would be "HELL NO!!!"

    Then who was the entity that were successful in increasing the value of the land, making all reality and support in the Bond closure?

    in the Bond prospectus page 6 which is a continuation of the Transaction Summary, The Project, It reads the following:

    "The masterplan and design guidelines of Phase 1 of he Project have been prepared by AAJ Holdings B.S.C. (C) (AAJ Holdings), a Bahraini architectural, project management and facilities management company indirectly owned by Mr. Ahmed Janahi, a Bahraini businessman."

    So the value of the land without AAJ's contribution was $83.2mn and with all what they have done its $879.1mn... Wow that's great stuff..

    I wonder what was Cyclone contribution in all of this? by the looks of it when they decided to contribute they manged only to fuck it up!!! a big hands of applause goes to the clowns for nicely fucking up a gold mine and helping in the fuckup of Oman's reputation when it comes to the security of foreign investments!!!!!!!!!!!!!!

  13. WT & Informed Omani
    Thanks for correcting the article.

    Thanks for kkeping it civilised.

    Anonymous whiner
    Tired of Blue City? Yeah, me too.

    After all, it's only the biggest corporate default and potential bankruptcy in Oman's history*; a default on almost a billion dollars of foreign borrowings obtained with Government support and based on almost free Omani land; a sum of money subsequently treated - in my opinion - like a personal bank account with no delivery on any promises while continuing to spend money like water; a project that has significantly increased financing costs for the entire country, indirectly damaging our entire economy; a project entrusted to people with zero expertise in such a project; and a fundamentally potentially sound concept eventually ruined by an act of selfish greed that arguably involved perverting the course of justice. Oh, and a mess that is totally unreported by the 'free' press in Oman because of wasta, influence and fear.

    So, er, Fuck right off.

    If this shit can't get dealt with, along with it's root causes, the long term prospectus for Oman is even more screwed than it is already. And we don't have an Abu Dhabi on hand to haul our asses out of debtors prison.

    *To put it in perspective, a default on the almost $1 billion in Blue City bonds is around 2% of Oman's entire GDP, and around 15% of Oman's total foreign debt. The equivalent as a % of GDP for the USA would be around $280 billion.

    Scaled up relative to GDP therefore, (USA GDP is around $14 trillion vs Oman $50 billion: 280 times larger), a default/bankruptcy of Oman 1 billion = USA 280 billion would place it 3rd on the all time global list of the biggest ever bankruptcies in the world ever - after Lehman Bros ($691 bln) and WaMu ($328 bln), but still well ahead of WorldCom ($104 bln), GM ($91bln), and even Enron ($65bln).



  14. Dear All,

    I think that Blue City has successfully done one thing, which is the change of their website yet again!!

    I am not quite sure that they are aware that they are supposed to be constructing a city!!

    God have mercy on this project!! By the way, don't bother yourself checking it... it has no information what so ever!?!? Completely and Utterly useless!!!

  15. Thanks UD for putting Blue City figures in the right perspective. Yes the issue is of huge importance to Oman, although media is not talking about it.

    Here the only news is CBO selling CDs, Fixed line subscribes increase, Bahwan introduces new brand of vehicles, cable of greetings, Private sector employs more omanis and so on almost predictable everyday.

    Please do delete remarks where foul language is used.

  16. Perhaps there is some truth in the cut and paste article
    that women can handle big sums better than men
    but then again perhaps a lifestyle on the interest of the interest of the interest dosnt give so much to spend per year - or does it ?

  17. Anyone care to comment on the fate of the poor buggers who bought blu city properties? I believe there is a refund clause if they don't deliver in 3yrs but presumably that only works if buyers stayed up to date on their payments. Is this moot given the bankruptcy, is class action equivalent the way for them to go?

  18. I certainly agree with the comment posted with regards to the poor people who bought the blue city project. I totally sympathize with them, and wish that someone from Blue City replies with a bit of honesty..

    Truly it would be a first!!!

    My advice, to the buyers is "SEEK LEGAL OPINION immediately".. Don't wait for a reply from them, they are a lost hope and a waist of air at the moment.

  19. why has Blue City red-done their web site?
    It does keep their owner’s advertising company occupied

    though interestingly they used a completely foreign web design team for their exciting new web site - wonder why?

  20. UD,

    No comments yet from Anees and his entourage. Sorry for posting this comment, but is Anees alive!? I heard he committed suicide. May be his Indian mafia (read Ashok Suvarna, etc) may know the truth. Either Anees is dead or absconding.

    Rest in Peace!

  21. Essdar to Buy $655.5 Million of Oman Blue City Notes (Update1)
    June 09, 2010, 4:26 AM EDT
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    e-mail this story print this story digg this save to add to Business Exchange (Updates with purchase details in second paragraph)

    By Arif Sharif

    June 9 (Bloomberg) -- Essdar Investments Ltd., a Cayman Island-based fund, agreed to buy $655.5 million of outstanding notes backed by Oman’s stalled Blue City development at a 37 percent discount.

    Essdar, an investment partner with Dubai-based Essdar Capital Managers Ltd., will hold 99 percent of two notes sold in 2006 by Oman’s Blue City Investments 1 Ltd. following a tender offer, it said in an e-mailed statement from Dubai today. The notes had a combined $661.5 million of outstanding principal as of November, 2006, the company said.

    Blue City, an hour from the capital, Muscat, was supposed to produce more than 200 villas, 5,000 apartments, four hotels, two golf courses and a clubhouse, according to the notes’ prospectus. A total of $925 million was raised from bondholders to finance construction, which started in 2006.

    Essdar said today it will pay $630.3 per $1,000 for $399 million of outstanding Class A1 notes due 2013 and $624.8 per $1,000 for $262.5 million of Class A3 notes due 2016.

    Blue City, a $20 billion real estate project central to the Oman’s economic transformation, was envisioned as a new community for more than 200,000 people. It missed sales targets as real estate speculators left Middle Eastern markets and a legal battle between the project’s owners undermined confidence.

    --Editors: Ross Larsen, Shaji Mathew.

    To contact the reporters on this story: Arif Sharif in Dubai at

    To contact the editor responsible for this story: Edward Evans at


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