Thursday, April 7, 2011

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.


  1. Looks very complicated - lots of people and lots and lots of money. All back slapping each other for bonuses but no buyers anywhere.

    Part 3 soon please.

  2. Dear Dragon,

    Great story! One small remark: under Omani law joint stock companies require at least three shareholders, limited liability companies require two.

    I look forward to Part 3.

    Expat lawyer

  3. Thank you
    This is like a Charles Dickens novel as originally issued – in parts for the dear readers of newspapers (could teach you know who a lesson) .
    Its very readable, amazingly well researched and OMG will make a very good novel and then film perhaps with a narrator called ‘Muscat Balaur’ to give it a suitable Romanian flavour .

    Perhaps Erin Brockovich cauld be co-opted to support the villagers.

    Casting couch anyone ?

  4. What about all those fine, fine gentleman from those upstanding firms such as: Maples and Calder, Walkers, Shearman & Sterling, Clifford Chance, Alan and Overy, and Trowers and Hamlins etc., etc. Did they work all for nothing? I mean, they are the best legal eagles in their field are they not? This couldn't have happened if they wrote the script could it? Nah, never. Nah?

    Issa Al Kloggie

  5. Champion Dragon, just champion. And Part 3 still to come! Will there be a Part 4? There must at least be and epilogue... surely? Its all just too outrageous for there not to be.

  6. I would like to say that the construction photos on your site are quite old, the properties are almost ready, so is the hotel.

    I hope you don't live in Oman, in my humble opinion the article is way too personal now.

    Good luck

  7. Anonymous - can you point us to a site to see the photos?

    UD has departed as per his blog description although he obviously has contacts 'in the know'.

  8. It is obvious that only those guys who want to cheat go to tax free havens. The same route is adopted India's 2G scam companies.
    I don't how HH Haitham fell into bad company. He could have easily roped in many good groups in Oman for this project.

    BTW in lighter vein the group formed in Sohar is called "Dragon Gang" for rioting. Hope Times of Oman will not link him to UD.

  9. Annonymous - you only confirm what the TA (Hill) writes in his letter, lack of transparency with this project. Even after the shit has hit the fan people like you (i guess you are one of those loyal employee) are covering up with no place to hide! UD has explained in detail and more is yet to come...can somebody from your office who knows more than UD explain with pictures and other details???
    If you can't please SHUT-UP.

  10. Wow..Good Story, waiting for more dear

  11. Waiting for Part 3, does there will be an happy like Hollywood :-)

  12. What A Waste ! I have worked for this Project and Saw Tremendous Opportunity for Oman and was Seeing It as The Gateway To Oman, But Sadly I Fall in the Hand of Crooks and when Money started Flowing , the Dream was Gone, this could have Solve the Unemployment's that is Rocking the Region and Could Serve as a Booster for the Country on Tourism Front but, Few Drains and a Sweet Tongue from Greed Experts, it all Sinking Like the Titanic indeed and the Solution is Very Simple.

  13. The army is recruiting by the thousands - bus loads of recruits coming into centres.

    I think this might be unofficial national service but discipline and curtailed roaming around the streets is a step in the right direction.

  14. Oman partners got too greedy and wanted it all, the 100% ownership. They launched the project with AAJ's support and happily kicked them out afterwards. If AAJ was not kicked out, this project would have happened, one way or another. Everyone lost in the end. Shame, shame!

  15. If you look at the project in paper it is dream project to be involved....

    I was involved in the project.....The fact forgotten was nobody gives money for free....
    The way the project was setup was doomed at the first instance.....I would say whoever set it up knew from the begining knew it was doomed....

    The banks don't give money either for free....The involved parties knew what was required to get the the cover letter and support from govt was enough for the bankers to release the everybody involved knew.....

    It is sad to say nobody knew....

    The contractors had lawyers involved for you know what happened

  16. If any one has time to spare this Friday – why not immerse yourself in the Blue Fluidity that was to be Blue City
    - click on box number 13 on the bottom left to learn what would happen to the “stunning and unspoilt land”
    Gosh - it all sounds too good to be possible

  17. Reminds me of that old joke...
    A Bahraini spiv walks into a bar,
    He meets an Omani pirate-rogue-conman type,
    who is drinking buddies with an Omani Royal type,
    Who is mates with a bunch of American MBA wanker-banker types,
    Who can get their hands on a shit load of O.P.M - OTHER PEOPLES MONEY!!!

    Especially those silly Japs - .05% interest rates will make you fucking BAANNZIII to buy some shitty funky-junky russian-doll paper-scrip, paying 13%+...WHAT COULD GO WRONG????

    Que regional real estate boom where every dickhead and his dog got issued a cheque-book, was told it was as good as money, had 100 pages - and oh please, oh please exercise self-control or you may have a problem!!
    In a joint where people drive like everyday is their last, believe unquestioningly that the man upstairs is in their corner, have the aggregate maturity of a freshman-frat-house... REALLY WHAT COULD EVER GO WRONG???

    Subprime lending - not here in sunny Oman i hear you say. No instead we had cheque-writing, money-printing en-mase by the mislead, gullible, clueless and greedy.

    This shell game of "financial engineering" AKA FUCKING CON-GAME, PONZI SCHEME, SCAM, STING, RIP-OFF, and general ass-fucking of the Omani real estate, lending and financial rating spectrum was perpetrated by a bunch of connected crooks who have thus far got off scott-free.

    No one is coming back to Oman to lend to your silly ITC scams. They will come back for AAA sovereign guarantees on strictly Govt. projects (PS. try not to fuck this up) - the rate will be high, the covenants will be onerous, and the terms rigid.

    That's what you get for consorting with crooks.
    The country will suffer - not the fat cats.
    The people who cant get jobs for stalled projects will suffer - not the fat cats.

    But - seek out the DRAGON GANG - those wrong doers and disturbers of the peace. Those threats to national security!

    Poor Oman - you are so like your British & American overlords (just without the sham of democracy) than you care to admit!

  18. Old Ex Pat.

    Used to be a time you could do a Good Job and see it happen.
    Nowadays, the Pinstripe Conmen are arriving in droves with Ice Buckets overloaded with Crystal Champers and Big Expense Accounts. No idea how to make Real Money just the ability to steal it in plain sight. Poor Oman - you deserve better. Get it sorted and create this dream and jobs for the youngsters.

    Free Zone Fred

  19. Part three: Since they decided to royally abuse those people who worked for up to six months without salary they are now being sued. It will be interesting to see if Omani law actually makes these lowlifes accountable for their behaviour. Or will that be another case of the Omani being able to do what ever he wants regardless of law (who cares about the imported labour anyway...)


If you wish to post anonymously, please pick a nickname by selecting the Name/URL option, or at least sign off your comment with one! I will delete comments I find objectionable or needlessly inflammatory. Sorry for the word verification.... OMG the spam has gotten BAD these past 12 months... trying to avoid making one log in...