A requiem for Blue City. As predicted long ago, Government forced to take over and bail out project. Part One.

The sad tale of Blue City
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
Bradley Hope
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'; buying winning 'awards' for a still imaginary development; issuing glowing press releases for every little contract awarded; even getting deposits on around 500 unbuilt properties; whilst generally failing to achieve anything of consequence.

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.

Quote:

...
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.

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.

View
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.

Blue City executes Anees' cunning plan of... bankruptcy. Or, How to blow a billion dollars

In keeping with the theme of financial fraud, Blue City is again in the news.

In UAE newspaper The National today is a nice article on the on-going slow motion financial train wreck that is Blue City.

Black cloud hangs over the future of Oman's Blue City
Bradley Hope
Last Updated: March 12. 2010 1:38AM UAE / March 11. 2010 9:38PM GMT
Blue City, Oman’s largest property development, could be forced into liquidation under plans being considered by the company’s board of directors, The National can reveal.

The board of Al Sawadi Investment and Tourism Company (ASIT), the parent company of the project, last month sent out a notice calling for investors to vote on the “dissolution of the company and filing subsidiaries”. The meeting has since been postponed to Monday.

“The company has lost all of its capital and have no reasonable expectation to meet their debt payment obligations when due,” the letter said. It was signed by Anees Issa al Zadjali, the chairman of ASIT.

Richard Russell, the managing director and chief executive of Blue City’s first phase, said in a statement the meeting had been postponed to allow a restructuring proposal to be made by some bondholders.

“Blue City is pleased to comment that the board meeting has been postponed for a short period to March 15, 2010, since certain Class A note holders have requested time to present a restructuring proposal for consideration by the Blue City shareholders,” Mr Russell said.

“Unlike most projects in the Middle East, our homebuyers in Blue City are secured by mortgage over the project assets of Blue City.”
...

Photo: Annes Al Zedjali, Chairman of a bankrupt company who started out with 32km2 of prime ocean-front real estate and almost a billion dollars in cash.

This has been predicted by Muscat Confidential for some time, with the latest post in January here for example. I continue to expect the scheme will be 'restructured' by the mortgage-backed bond holders, enabling them to get all the land and the works completed to date. GCC money is already coming in to the project. This has been the plan for some time.

Property developing ace and part-time paper boy Chairman Anees Al Zedjali has clearly figured that he's ridden this pony as far as he can, especially now that Bank of NY Mellon have firmly closed the taps. More legal disputes will now be on the way as the tussle between the various bond holders, credit default insurers, escrow account trustee Bank of NY Mellon, shareholders, contractors, sub-contractors and holding companies gets going. The lawyers will pick the bones clean.

Meanwhile, the executives of Blue City and its failed Chairman continue to sit on their fat bank accounts. Remember the project borrowed over $900 million dollars, and has continually pumped itself up on a steam of self agrandising hallucinations. If I was Bank Mellon, the bond insurer or a less secured bond holder I'd be making inquiries as to whether civil or indeed criminal charges should be instigated. There may be no holidays in Florida for Anees for a while...

While publicly the blame will no doubt be laid on the global credit crunch, project delays and AAJH etc etc, probably aided and abetted by support from the pages of Times of Oman, the gross financial mismanagement will presumably be ignored.

Eventually a scaled down phase 1 will be completed, with the hotel, marina, golf course and a load of villas, owned mainly by Kuwaitis, Qataris, Saudis and Iranians. While every businessman in Oman who wants to raise foreign capital, even for a project that's real, will see significantly higher interest payments and a lot less interested lenders. Contractors will factor in higher default risk and counterparty premium. This will damage the entire Oman economy, to an extent. But Anees will be OK.

So that's alright then.

Blue City: An update.

The problems at Blue City continue.

Even the rather distant Bank of New York Mellon, custodians of the purse strings, seem to be fully aware that the money they are responsible for doling out on behalf of the bond holders is being pissed away on high salaries and pocket-lining for the gilded few at the top of BCC1. As a result they have turned off the taps as much as they can. Richard Russell has been flying so often to the big apple, cap in hand, he must be past platinum class on his frequent flier miles.

As Samir Pandiri, Managing Director at Bank of New York Mellon put it, in this hilarious excellent piece on the extensive financing controls for Blue City:

Welcome to Blue City, the landmark development in Oman that is a case study for the rapidly evolving world of project finance and expanding role of trustees. In this Global Corporate Trust Innovation Series edition, Samir Pandiri discusses the financial complexities of building Blue City and the future of project finance it represents.

...
On this landmark tourism development project, The Bank of New York Mellon was selected by Blue City Investments 1 Limited to provide multiple corporate trust services, including acting as trustee, registrar, agent, cash manager, account bank, lookback calculation agent, and Irish paying agent.

What makes this deal different is that the trustee is involved in every part of the transaction, well beyond the trustee’s normal project finance role. The Blue City project required a hybrid approach, with structured finance, credit enhancement, real estate financing, and project finance rolled up into one seamless package. Phase 1 groundbreaking, for example, was delayed by architectural revisions. As trustee, The Bank of New York Mellon was required to review certain consent requests and acknowledge that the resulting consent to delay would not jeopardize bondholder rights or result in rating downgrades.

The ownership structure, securitization, and international cash flows also make this project different. For example, the notes are protected by reserve accounts backing payment of principal and interest on certain series, a credit insurance policy backing payment of principal on certain series, real estate collateral, cash flows resulting from sale of the residential properties, and operating cash flows from the nonresidential assets once operational.

The successful sale of residential properties will ultimately determine whether the project can move forward. As trustee, The Bank of New York Mellon is charged with making that determination on the part of the investors by applying a capital expenditures test and a residential sales test. The Bank’s global analytics group will perform the tests, monitoring and performing calculations based on raw data provided by various parties....

.

Ahem. Yes.

So, as the coffers are almost empty, salaries for the elite have not been paid so far this year, at least not by BCC1. I'm reliably informed the last salary cheques had to be funded by parent company ASIT. Meanwhile, 15 senior expat staff at BCC1 were given notice a couple of week's ago and will have to vacate their positions. More expats are due to be culled soon, including, rumour has it, even Saleh Miri, CEO of parent ASIT. I already reported the jettisoning of project management contractor ACE and the storm clouds over the future involvement of the (pretty good) main developer AECO, who also haven't been paid for months.

Interestingly, I'm told the indescribably valuable services of Ms. Margarita Filipotti, award-winning Marketing Director of Al Madina A’Zarqa, are deemed by the controlling Al Zedjali brothers to be well worth retaining, even at a surprisingly pricey salary of 7,000 rials a month. She must be a top performer indeed, and of course there is so much marketing to be done!

Yes, 7k a month. Hey, the whole senior management team have long been on similarly large and larger wads. (7k RO is about US$220,000 a year tax-free kids, plus the expat perks too. Sweet deal for an almost bankrupt company isn't it? Amazing how easy it is to spend borrowed money when someone else is doing the borrowing...)

Paranoia is also building, with BCC1 even trying to use text comparison analysis to find who is leaking the info on the project. Someone there has been watching a little too much CSI Las Vegas lately (fear not chaps - I am NOT a BCC1 employee. Even you guys don't pay enough...)




The Bahrain ex-partners, AAJ Holdings, who got the original deal off the ground and who helped to get the $925 million in junk bonds sold via ever-so-slightly-dodgy Oppenheimer Investments AG**, are amazingly still battling it out in the courts. They - surprise surprise - lost the most recent court case but are re-appealing the decision. By the time they win, if they do, there will be precious little left worth winning.

Photo: Early days. Did anyone realise at the time that the billion dollars was just for the model?


The real power is in the ownership of the bonds, and the key role to be played by trustee BoNYM, IMHO.

Doing the rounds - crazy as it sounds - is the rumour that the real strategy post-real estate meltdown* is to effectively bankrupt the BCC1 holding company, and thus activate the default on the bonds (which are secured against the full 32km2 of beautiful land that was presumably provided free to enable the glorious development and at the same time provide the equity stake of Cyclone LLC)... With bankruptcy, AAJH would be left with 70% of a dead company (if he wins the appeal - which is likely) and even end up potentially liable for the multitude of subsequent claims; the main contractors AECO would have no-one to claim the early termination fees from (a hefty 10%, I'm told); and who-ever picked up those Blue City junk bonds last year for 60 or so cents in the dollar could then claim all the land, plus whatever's left in the escrow funds from sales deposits already made, resurrect the development (with new local contractors), finish the scaled down ITD development, and make a huge profit from those redesigned villas that have (perhaps) already been sold! Wow.

But of course that would be totally insane. Imagine the incredible damage to Oman's reputation if the most important project in Oman's history went bust and defaulted on its obligations; the squandering of the land that was meant for 'A new city of 200,000 people'; the lost goodwill of contractors and financiers across the world; and the waste of all that Government paid-for infrastructure (including power supply, roads, the mega-fast-fibre optic cable links to India, etc). Simply to enrich those few who would stand to gain from such a dastardly scheme? It's the most preposterously unbelievable and untrue rumour I've heard in a long time. Afterall, the 'conspirators' would have to both control ASIT and BCC1 and the bonds and be in a position to control the spin on the bankruptcy through the media and handle the ramifications within the highest reaches of the Government and be able to influence the Government to still deliver the infrastructure support. Like I said, this is so obviously impossible it must be simply untrue.

So that's alright then.


*scapegoat of the year, BTW. We can keep blaming the USA and Jewish financiers!
**No connection what-so-ever to the famous Oppenheimer family, as law suits in New York attest. Shady. And they charged $25 million. Sweet.


Photo: ASIT Chairman, Anees Al Zedjali, tells it like it is.

As real estate developer par excellence and part-time newspaper editor, respected ASIT Chairman Anees Al Zadjali said so eloquently:

"The Blue City is one of the most important developments in Oman. It is much more than just a real estate development. We are creating a city which will take Oman into the next century, providing not just homes, but new jobs, new industries and a legacy for the future," he added.

"As the cornerstone of the new city, the first phase of the development will set the tone and style for what is to follow and will offer wider opportunities beyond freehold property."

Indeed.

In totally unrelated news, Muscat Daily confirmed yesterday the report last week of the largest ever fraud in Oman history, with a ponzi scheme that ripped off some 3,200 people of over $220 million dollars.

Hmmm. Perhaps that should have read largest ever to-date?

Breaking News: Shit finally hits fan at Blue City: Redesign allows contractors to get the boot (maybe)

Ah, Blue City.

Or as the BCC1 PR chaps prefer, the post-AAJH name of 'Al Madina A'Zarqa'


Photo: Blue City's aspiration before the global real estate crash.

We've had a history here at Muscat Confidential. You can check the back posts if you're new. But good news for Blue City investors and bond holders.

It's rumoured BCC1 has actually met its sales targets via bulk sales to Qatari/Kuwaiti/Saudi/Iranian money. A miracle indeed. [Though Dubai collapsing, the fact Blue City is in safe Oman AND the prices were - to be honest - a relatively good deal in this regional market.]

That was the good news.

Photo: The old bait and switch.


The bad news is that the clients want villas, not fancy Euro-style flats. So a reshuffle of the design - finish flats sold & started, plus the hotels and golf course, make the rest phased villas and town homes - means the existing contract with ACO is waaaaay too pricey. Negotiations to agree a new much reduced % for AECO broke down a while ago, and now BCC1 is (quite legally) using the clauses in the contract to dump the old contractors (well, maybe... a negotiation is seldom over in Oman) as they can get a number of local lads to slap up some villas and don't really nice some pricey foreigners so much.

Photo: Negotiation, Oman style.

Still, cash seems tight. I'm told the main Project Engineers ACE, the chaps who actually supervise the contractor AECO, have been kicked off the job* and staff will be repatriated asap. Thats around 70 guys. If AECO really do go (and they haven't yet) that'll be about 2000 workers off the job and sent home this month plus another 2000 next month, along with the people organising them.

Reports that the staff at BCC1 themselves are not getting their salaries on time lately. Money's too tight to mention.

So, good news for Oman! is how it can be spun: the scaled down ITD we all knew Blue City would be looks like it will come to pass. And the local boys will get a bit more work. And the (newly 'regionalised' from the original Japanese, at a discount) bond holders get paid, and masses of free Government infrastructure will get built. The brilliant jeweled city will come... er... later, for sure.

Nice play.

Hey Dragon! So what if a few totally legal contractual clauses get executed ... and (mainly foreign) contractors take a bit of a haircut? Its a recession! you might ask.

Well...

Fair enough. And if Richard can snatch salvation from the jaws of bankruptcy, well, I'm sympathetic. 'A man's gotta do what a man's gotta do, give me results, thats why you get the big bucks, Omelettes and eggs', etc.

Although, I'd just note that when a business starts to play the 'hard ball contract game', it usually gets expensive in the longer run. People in future don't want to work with you so much, lots of inefficiencies occur, and as a result you (and sometimes the wider industry or country) end up paying a higher 'risk premium'.

And those contractor expats will return to their home countries and slag off Oman, seeing as how some of them have just paid deposits for rent.. Making it that bit harder to recruit for everyone. And to attract tourists.

So thanks Richard. Glad those Qataris like the villas. You're doing a good job for your shareholders. Time for a press release soon?



[*several reports say for 'non compliance']

Blue City's new sales office... a sneek preview. And the Appeal court rules both for... and against... AAJH.

Photo: Blue City's new sales office.

As promised in a recent comment response to BCC1 apologist, the anonymous 'John', who took great exception to a recent post that implied things were not totally OK with Blue City's cash flow (and seems to have difficulty accurately recalling his company's original promises with regard to the number of golf courses and public buildings promised in Phase 1).

Here's a peek at the new BCC1 Blue City sales office, just completed at great expense. It is amazing what you can do with borrowed money, eh John?

John's approach IMHO actually shows a common problem with wastafarians here: when people start asking uncomfortable questions, their response is to attack them as evil, disrespectful, etc; to state that there are no problems (and certainly nothing that might be blamed on the highly experienced board of BCC1 or Cyclone LLC); and wait for everything to blow over. It is indeed almost a GW Bush/Cheney approach to criticism - attack the messenger.

Perhaps we'll all just have to wait for the next ratings report from the bond holders.

Oh, and the appeal court - in what to me seems a bizarre finding - finally ruled on the 11th of May on the dispute between AAJH and Cyclone over the ownership of Blue City. I'm told their ruling was that yes, AAJ Holdings does own 70% (as had been found by the original court verdict, appealed by Cyclone), but that they were somehow also instructed to transfer their 70% to Cyclone in return for just the original US$38 Million. Hmmm. So they own it, but have to sell it. Maybe a lawyer can explain. Did the court find the original sale illegal, and thus effectively annulled the share transfer?

I predict more to come on that issue in the regional press very soon.

PS: Don't know why Internet Explorer is having wierd errors lately, especially on that Blue City post... Firefox seems OK.

More cash flow woes for Blue City? Reports that planned Public Buildings have been shelved.

Observant readers will have noticed there have been no press releases from Blue City (aka Al Madina A'Zarqa) lately about how basically everything is on track. Things can't be going well when there are not even stories to report of meaningless progress milestones, contracts signed, or glittering awards won for things not yet built. Lets see what the next "Quarterly News Bulletin" says, expected this month, unless Issue No. 2 of this riveting mag is delayed too.

Meanwhile, the Dragon’s sources in BCC1 have informed Muscat Confidential that construction of eight of the planned Public Amenities buildings in Phase One have been “indefinitely suspended”, whatever that means.

Fortunately our sources were clearly undeterred by an earlier note (reported here) from BCC1 top management threatening their staff with disciplinary action if they shared news with the media…

Buildings affected by the cash-saving axe are (apparently): A Mosque, Police Station, City Hall, Medical Centre, Post Office, Nursery and Kindergarten, Primary School, and Fire Station.

Of course, the original plan had a 27 hole golf course, already cut back to 18 holes, and BCC1 management were even considering building only a 9 hole course until it was pointed out that no-one would come to play at a 9 hole course in the middle of nowhere. . .

As noted in some of the PR releases from Blue City,

Phase one, a 2.5 sq km development, comprises around 5000 apartments and 500 villas. Initial sales began in December 2007, with one-bedroom apartments priced at about $179,400 and two-bedroom apartments at around $291,200. Three-bedroom villas are being sold from around $535,600.

The project is set to include three five-star hotels, an 18-hole golf course, shops, schools, mosques and police stations. Slated for completion in 2012, the phase one site is expected to create around 7000 jobs.

Or to quote from His Highness Sayyid Haitham Bin Tariq Al Said, as reported in OCIPED's newsletter in 2007

“Al Madina A’Zarqa is planned to become a model for a lifestyle that adapts to the surrounding environment. The project has not excluded traditional Omani architectural design and construction; on the contrary, it is inspired by architectural elements to be found in the local environment. Al Madina A´Zarqa is planned to be a model for those seeking relaxation in an integrated community that meets the need of daily life, including family and work requirements”.

The problem with public amenity buildings is, of course, that while they might meet the integrated needs of residents daily lives, they cost good money to build while providing didly-squat in terms of sales income to the developers. So presumeably the residents daily lives will be a little less complicated and a little more relaxed in Blue City. I mean, really, who needs a lousy post office?

I hope those buying the Blue City's apartments and villas (actually, relative to other Oman developments, I must say they are very competitively priced) looked very carefully at their contracts to check exactly what hard guarantees they really have with regard to general facilities and other public amenities. Perhaps this is why they have not been cancelled but merely 'indefinitely suspended'...?

This was all expected. Those in the know were long predicting - even before the global crisis and GCC's regional meltdown in the off-plan speculative real estate model – that the grandiose plans for Blue City would be forced to revert to a standard integrated tourism development complex: A few hotels, apartments and villas; maybe a marina and some shops and restaurants, a golf course and Spa, and some beaches to sunbathe on. Throw in some diving and fishing/dolphin watching, and you can imagine a 'Shangri La by the Daymaniats' experience quite easily, and very nice for a week or two's holiday I'm sure it will eventually be.

The Government are also, it seems, still pressing ahead with their side of the deal, with a tender for the overhead powerlines that will carry power to Blue City's town issued last week.

But the whole stand alone economic model; all the "it's a new city for 200,000 people we're building, the future commercial capital of Oman, blah blah blah" crap, so hyped before the construction was delayed and contractual sales targets missed, always relied on massive internal economies of scale – Lots of businesses and residences with local staff who would need schools and universities for their kids, whose teachers would need a hospital, whose nurses would go out to restaurants, etc etc. So cut backs might indicate the real future is not so grand, at least unless the Government steps in and forces some Ministries to move up there.

It didn’t help either when the 'Medical City' planned to be built next door, and promising the usual Dubai-esque array of yet more universities, hospitals, schools, etc etc etc, was cancelled in October last year.

Sue Hutton of NewsBriefsOman pointed out in March this
recent article from UK based MoneyWeek on why not to buy property in Oman:

Sadly, Oman's property boom is likely to be little more than a mirage – and one that sounds remarkably like Dubai's. The developments are huge – the first will consist of 4,000 homes – with tiny properties "pressed closely together on modest plots". These shoe-box homes don't come cheap. An 82 sq m one-bedroom flat will set you back £210,000. But at least it's in a convenient location – right next door to Muscat airport.
Pundits argue that Oman is a better bet than Dubai because it's pursuing a steadier process of development. Perhaps they haven't noticed that it's currently building an entirely new town in the desert northwest of Muscat. The Blue City will have accommodation for 200,000 people when it is completed in 2019. What's unclear is where these 200,000 people will come from.

...

Another fear is Oman's track record. Last October thousands of tourists found their holiday plans cancelled when Oman announced that the Gulf Co-operation Council Summit would take place from 26-30 December. Every room in six of its leading hotels was requisitioned for the conference, causing thousands of bookings to be cancelled. A country that tolerates foreign investment rather than welcoming it isn't a reassuring prospect for anyone thinking of sinking thousands into off-plan properties. In short, we suspect that if you're patient, you'll find better opportunities closer to home long before Oman is ever worth buying into.

Hmmm. A little harsh at the end I thought.

Perhaps this is why Blue City changed their logo to a stylised plug hole?

More Real Estate, Blue City and Bank Muscat

Busy as all hell this week. But at least the bottom seems to be near for global equities.

Bank Muscat was strongly tipped as due for a bit of a bounce on rumours that preceded the official announcement they will take profit on the bank investment in India (although one might have expected it's book value to already be in shareprice...). The market seems to be correct vs the tipsters however, as the shares resumed their slump back toward the recent record lows. After loosing close to 80% of their value (in rial/US$) the Government is probably establishing a floor around 0.500 rial. (Hope your savings plan wasn't too heavy on BKMB shares Muscati!)



But something's going on, even if its not reflected yet in the price - look at that turnover! Gee, I wonder if there has been a little bit of insider trading going on? Or perhaps an attempted 'pump & dump'?

Anyhow.

News of immanent meltdown everywhere is tapering off, but its still good to be here in Muscat and to be sheltered from that massive storm that's raging in most other parts of the world.

Even Dubai is perking up and trying lamely to reinvigorate it's old swagger, having picked up a nice loan from big brother Abu Dhabi. Dubai is now reminding everyone it actually has a real, core, value generating economy as an entrépot trading port, etc. Well, maybe so, but I won't be rushing to buy real estate chaps just yet.

Meanwhile Muscat small and medium scale real estate construction is ticking along nicely, but the news has gone rather quiet from the big developments. Rumour has it that HM himself gave Sh. Maktoum a call and asked (very politely I'm sure) what the *%^&*^% is going on with Dubai Holdings and their stalled Yeti project, and that he'd perhaps better 'use it or loose it'. Anybody want to buy a really cheap breakwater and some damp sand?

Blue City's BCC1 CEO Mr Richard Russell is allegedly getting a bit paranoid too, sending letters a while back to various contractors and staff reminding them about their contractual duty to secrecy, and that they'd better not be leaking info to the press and blogs (I guess he means info like wild and crazy stories of sales to the Abu Dhabi Pension Fund, or the state of renegotiations with twitchy bondholders).



I'd reproduce the letter... but... if I was RR I'd have put little hidden variations in the text to uniquely ID each one. ;-)


More news soon. Work crises have been fortunately averted through personal intervention, so having earned my money for a while will try and be a bit more 'bloguctive' this week, inshallah.

[Unless thwarted by Essa's so-far unsuccessful Global Zionist conspiracy to occupy peaceful upstanding Sudan and take its 'vast resources' by arresting their genocidally accused Field Marshall President. Vs China's successful conspiracy to get a strategic holding in blood-soaked Sudan.

More on that tomorrow. Was this YOUR day in the office? Or perhaps YOU work at the Times of Oman?

Enjoy.

Breaking News: Blue City make big sale of Golf Course apartments

Just a quick breaking news story.

My sources tell me Blue City have just (this morning) managed to sell 120 individual units of the golf course apartments to .... Abu Dhabi Pension fund, and have received a crisp $20 million cheque as a deposit.

Nice one. Discount and price were not available, but it is a good source of confidence in the deal by a major external player (albeit one with shedloads of cash).

Blue City it may never become, well, unless the Government decide to decamp the Ministries to Al Sawadi in some future high oil price world... But Blue City resort will obviously be a go: i.e. some villas, apartments, hotels, marina and golf course. I hope they're sensible and don't cut the golf course down to 9 holes, as that would be penny wise-pound foolish as they say.

the inevitable happens: Blue City's highest rated bonds downgraded to Junk

News just breaking that, surprise surprise, Blue City's bonds have been downgraded by the Fitch Rating agency.

The commentary seems pretty balanced and, well, true. Blue City have been slow, and that slowness cost them big time as it meant they didn't have stuff to sell in the hey-days of real estate in the GCC. Now, it's a little late.

Plus they have missed by a huge margin the covenants they made on sales. Collections (ie, the cash they've taken in from people via pre-construction sales) at the last interest payment date on 7 November 2008 were just $35 million, versus the original target of $165m. Cash take even failed Blue City management's re-revised target of $49m.

Ratings are deliberately obscure: BBB and above is investment grade, which means pension funds and banks can hold them. As usual, Blue City's borrowing was split into tranches will different claim on the assets and income, thus allowing BC to have a subset (just less than 30% of the $925 million they borrowed) of their bonds classify as investment grade 'BBB' by being entitled to first call on the cash. Even when issued, the remaining 70% of the borrowed money was junk. Now it all is.

More critically, if Blue City fail to raise $455 million in sales by 7 November this year, they are obliged to repay all the debt. Ooops. Sounds like insolvency looming to me.

As a result of this Blue City are desperately trying to renegotiate the terms of the loans. Meanwhile, Bank of New York Mellon - who I think hold the cash in escrow - have (I'm told by my sources within BCC1) not released any money to Blue City for the last 2 months. So no contractors are being paid, Bovis (the project manager) have walked out in disgust (previously reported here), the shareholders are still in court, and no-one in their right mind is buying property off plan in the GCC...

Perhaps a friendly Bulgarian Bank could be convinced to throw a big loan to Blue City's well connected Cyclone shareholders?

At least the construction of the hotel has started. But it won't help the way Omani bonds are seen in the market, especially if they miss payments.

Meanwhile, Al Sawadi Investments and Blue City management continue to be very well paid even though they seem to have a policy of stiffing their contractors.

So that's alright then.

BTW, Fitch's ratings are as follows:
Investment grade
* AAA : the best quality companies, reliable and stable
* AA : quality companies, a bit higher risk than AAA
* A : economic situation can affect finance
* BBB : medium class companies, which are satisfactory at the moment

Non-investment grade (also known as junk bonds)
* BB : more prone to changes in the economy
* B : financial situation varies noticeably
* CCC : currently vulnerable and dependent on favorable economic conditions to meet its commitments
* CC : highly vulnerable, very speculative bonds
* C : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
* D : has defaulted on obligations and Fitch believes that it will generally default on most or all obligations

PRESS RELEASE: Fitch Downgrades Blue City Invest 1 Ltd Notes
Thursday January 29th, 2009 / 13h22
Fitch Ratings-London-29 January 2009:

Fitch Ratings has today downgraded the A3, B1, C and D class notes of Blue City Investments 1 Ltd (BCC1) as detailed below. All the classes remain on Rating Watch Negative (RWN).USD262.5m class A3 (XS0267260346): downgraded to 'B+' from 'BBB-' (BBB minus); RWN USD143m class B1 (XS0259701018): downgraded to 'B-' (B minus) from 'BB'; RWN USD50.5m class C (XS0272445726): downgraded to 'B-' (B minus) from 'BB'; RWN USD70m class D (XS0273296243): downgraded to 'B-' (B minus) from 'BB'; RWN

The transaction is a securitisation of a USD925m financing package for the development of an upmarket residential, hotel and leisure resort on the Indian Ocean coast at Al Sawadi, located 90km to the west of Muscat, the capital of The Sultanate of Oman.
Fitch initially placed the notes on RWN on 4th July 2008 on the basis of poor sales performance and due to concerns relating to a legal dispute between the development's shareholders. While BCC1's new management successfully implemented operational and organisational improvements and introduced a more clearly focused marketing and sales strategy, the transaction continues to under-perform and the shareholder dispute remains unresolved. The project will also be challenged by the highly uncertain near term outlook for Oman's integrated tourism resort (ITR) market because of the global economic slowdown and the recent and rapid softening of the economy within the Gulf Cooperation Council (GCC) region.

The project has failed all of the documentation's Residential Sales Tests tested to date. Collections at the last interest payment date (IPD) on 7 November 2008 stood at USD35.0m versus the Residential Sales Test 1's target collection level of USD165.0m. Collections also fell substantially short of BCC1's revised forecast of USD49.0m.

The shortfall between actual collections and target collections as per the documentation's sales tests is largely attributable to three reasons: first, sales commenced significantly later than initially envisaged, and construction progress also suffered delays, due to changes to the master plan following the transaction's closing in November 2006; second, the actual payment plan for purchase price instalments under the project's residential sales contracts is linked to construction progress milestones, whereas the payment plan structure assumed by the documentation is linked only to a time schedule that was determined at closing and did not anticipate delays in the commencement of sales or construction; third, the Al Murjan section, which was forecast to generate sales of 800 units during 2008, proved unmarketable due to shortcomings in its design concept, forcing BCC1 to redesign this section and leaving it without any new product to sell for most of 2008.

As a result of the delayed launch of units to the market and slow sales progress to date, the project missed out on a period of strong growth in the GCC's real estate sector that the development was intended to take full advantage of. The GCC real estate boom came to an end in late 2008 and while the decline in prices and transaction volumes in Oman's ITR market is, due to its small size, more difficult to assess and quantify compared with the more transparent markets of Dubai and Abu Dhabi, the near-term outlook is negative and uncertain, undermining the confidence of both purchasers and developers. The agency understands that all the ITRs within the greater Muscat area on which construction has not commenced were temporarily put on hold by developers in late 2008.

Even if sales progress over the next two quarters is in line with BCC1's current expectations, the transaction will fail Residential Sales Test 5 on the 7 November 2009 IPD, which calls for USD455.0m of aggregate collections, triggering the immediate acceleration and mandatory repayment of all outstanding debt.

The agency understands that BCC1 is seeking to restructure the transaction via far-reaching amendments to the documents and will shortly be submitting its proposal to the issuer note and security trustee, The Bank of New York Mellon ('AA-'((AA minus))/'F1+'). BCC1 has informed the agency on an informal basis that the proposal will likely include changes to the Residential Sales Tests and Capex Tests, the launch and construction schedule of the project's different sub-sections, the payment schedule under the construction contract and the final legal maturity date of the notes in an attempt to avoid an acceleration of the debt and provide the borrower with a greater level of flexibility to respond to the changed market environment. Fitch intends to resolve its Rating Watch as more information about the proposed restructuring becomes available.

Regardless of the scope and effect of any amendments to the documentation, the agency nonetheless believes that BCC1 may face liquidity constraints and require an equity injection in the future, depending on future sales and collections volumes and the extent to which payments under the construction contract can be further back-loaded.

Following initial delays after the re-design of the masterplan, the laying of foundations of the first hotel began on 20 January 2009 and foundation works are scheduled to begin on the Al Naman apartment section on 15 February. The workers camp, with capacity for 9,000 workers, was completed in November 2008, and further enabling works on the site are ongoing.

Fitch will continue to closely monitor the performance of the transaction. Updated surveillance information and the new issue report can be found on the agency's subscription website, www.fitchratings.com.

American Taxpayers bail out Blue City - Project will continue

Sources in BCC1 tell me that Blue City’s Al Madina A’Zarqa project has just been given assurances of 100% underwriting on the credit lines needed to complete the project by Bank of New York,

the appointed representative (Trustees) of the original Bond Holders. This is of course in some part because the bond holders are in pretty deep already, at ~40% of the investment cost sunk. So going ahead is the only chance of getting any money back.




There are also proposals to scale some of the project scope down, especially those communal bits they can't they can't sell like the Golf Course, and slowing down the development, but you're still talking a huge investment effort over the next few years.

I wonder if the money is - indirectly - effectively coming from the US Government's good ol' American taxpayers, at low rates of interest too, via the massive bail-outs over there? Wouldn't that be ironic headline for an incisive 'ViewPoint' piece for the Times of Oman - "Here comes the Cavalry!! Blue City project on track thanks to the Americans"...

Even better, it means the loans won't appear on the Government's books, and there will be some continued fiscal stimulus. Plus it will unlock significant Government spending on infrastructure.



Meanwhile, the boys at Blue City are being rewarded for hiring the big executive guns (mainly... American) at vast expense, and the party can continue for the management and the shareholders.

Woes continue at Blue City. Poor sales and Bovis heads for the exit

In the on-going saga that is, supposedly, Oman's biggest single investment project, Blue City or Al Madina A'zarqa, the woes continue. The grand design is struggling to move forward on plan.

The project failed to meet its August 7th revenue target that it committed to when it borrowed the almost 1 billion dollars to start the project.

Abu Dhabi media outlet The National reports yesterday that BCC1 management confirmed that Blue City sales receipts were only $31mln, well short of the $101 commitment, and despite new CEO Richard Russell previously expressing confidence that they would meet the target.

The next challenge will be making November's revenue target, with BCC1 needing another $155m in revenue to meet the next target of $186m by Nov 7. And in a local (and global) real estate market hit by falling prices, tightening credit and a glut of similar opportunities that are much further down the track of completion (like the Wave), thats a hill to climb with 1 month taken out by Ramadan. That's 5 times the revenue raised in the last 6 months to get in the next 3 months. The CEO is already talking of promotions and discounts, but with much of the original money already spent on redesign and rapidly rising costs for construction, he'll have his work cut out. I'd expect the only option he has will be to offer discounted blocks of villas and apartments to some big players, perhaps in exchange for a much higher upfront deposit. Which will hardly help profitability but may get him past the important November hurdle.

Mr Russell's problems aren't restricted to a slow summer in Muscat either. My sources tell me that the experienced international management company hired by BCC1 to manage the development, Bovis Lend Lease, are (allegedly) heading for the exit and making plans to pull out of the job. Another horse change in mid-stream will not help, with the CEO being replaced only a couple of months ago. And it begs the question who will step into the breach? I predict a move 'downmarket' to a possibly less western company.

The disfunctional relationship between the owners Cyclone LLC and AAJ Holdings, who are still only talking through their lawyers as they battle for control and ownership in the Omani courts, also means the Board of Directors of BCC1 is certainly not running at full speed. And this is the sort of time when firm and steady governance at the most senior levels would be most wanted by the CEO and investors.

In June, sources close to the project told me that W.J. Towell, who had been asked to design the 1 million rials fit-out of the new headquarters office for BCC1, were kicked to the curb and new Contractors had to be hired. There are additional reports I can't confirm of other contractor change outs too.

It would seem contractor management is not a strong suit for the BCC1 team, headed of course by Said Anees Issa Al Zadjali, Chairman of the Board at Blue City Company 1.

Oh dear. Don't expect to read this in the Times of Oman, nats.
The big question is: when will the Government be forced to move in and do a rescue? I don't think there's anything fundamentally wrong with the concept or the location, but doesn't such a strategic project need to be in the hands of the professionals?

Watch this space.

Blue City misses yet more revenue targets

Bradley Hope
August 13. 2008
ABU DHABI // Blue City, a US$20 billion (Dh73.4bn) development that could put the Sultanate of Oman on the global property map, has fallen further behind in meeting its revenue targets in the wake of a Fitch Ratings warning that identified financial threats to the project.

The project has been consistently short of its revenue targets since it began sales earlier this year because of delays caused by a redesign of the master plan, legal disputes over the ownership of the parent company and a management shake-up.

In the past three months, Blue City has booked revenue of $3 million from home sales, taking its total revenue to $31m – far short of its Aug 7 target of $101m, said Richard Russell, the chief executive of Blue City Company 1, which is in charge of the first phase of construction of the project.

“We’ve had progress on collections, but there is still more to go,” he said of the development, located about 45 minutes northwest of Muscat.

The shortfalls led Fitch Ratings last month to put the project on “ratings watch negative” for $526m worth of debt it had raised for the first phase of the project as part of a $925m bond.

The Fitch report warned that while missing the targets would not likely lead to immediate sanctions by investors, it could mean problems on the horizon.

“If sales performance does not improve significantly over the coming months and quarters, the borrower may eventually struggle to continue funding the construction costs of the project,” the report said. Another report from Fitch is expected in the coming weeks.

Mr Russell said those concerns were premature and that the project would be finished on time, in 2012. In the coming months, more than 3,000 units, including 200 golf-course villas, will go on sale. There are also negotiations to sell large blocks of apartments to investors, which Mr Russell said “were getting very close” to completion.

Another $155m in revenue is needed to meet the next target of $186m by Nov 7. “We want to be on target by that date,” Mr Russell said. “In the summertime things slow down here, so we haven’t really been pushing new launches. Those are very much on track now. You’ll start to see some promotions.”
...

Blue City replaces CEO, Cyclone continue to lock out AAJH

Meanwhile, in other news, the Blue City project have replaced their CEO of BCC1 with an experienced American professional from the UAE, Mr. Richard Russell. Prof. Akhlaghi reportedly is deciding to 'pursue his personal aspirations', (which does sound very much like the ‘I have decided to spend more time with my family’ excuse so common in the West).


New Blue City CEO to re-energise Al Madina A’Zarqa

Times Friday, June 20, 2008 9:29:27 PM Oman Time

MUSCAT — Blue City Company 1 SAOC, the real estate development company tasked to deliver Phase 1 of Al Madina A’Zarqa, the most significant real estate infrastructure project in the Sultanate of Oman, has appointed Richard Russell as its new managing director and chief executive officer. Following the decision of Prof. Akhlaghi to pursue his personal aspirations, Russell has taken over the position from Prof. Fari Akhlaghi, who will now transition into a new role as an advisor to the board of directors on the project….

Meanwhile the battle as to who actually owns the project between the Bahraini company AAJH and Cyclone LLC continues. The higher court (where Cyclone successfully lodged an appeal following their defeat in court a couple of months ago) is due to rule in a few days on June 23rd on the validity of the injunction and thus the effective ownership of BlueCity.

Apparently the AAJH representatives and the Management of ASIT, including Anees Issa al Zadjali, Chairman of Al Sawadi Investment and Tourism Company (ASIT), are not really speaking. A contact working for Anees told me that after their victorious court ruling, AAJ tried to visit BCC1 to re-establish contact and find out what was going on, but he was not even allowed to enter the building. Meanwhile, not surprisingly given the price rises in cement and steel, the projected costs for phase 1 are now $2 billion, and the plans for the 27 hole golf course have been pared back to just 18 holes to save costs.

Watch this space. There’ll be more fireworks at Blue City over the next couple of weeks… I can certainly understand the motivation to battle it out when you're talking of a 70% share in the profits on a $20 billion development project...

Blue City starts to fight back against the rumours and lawsuits

A very interesting press release yesterday by Blue City, aka Al Madina A'Zarqa. You can read full versions in Times of Oman [which you should note is connected to the project through family connections, so is a common source of relentless positive spin for the project], and also at such sources as Zawya

It is far from the usual puff piece, but is very specific about emphasizing that the idea that funding of phase 1 is secure. It seems a story designed to reassure those who have put deposits on phase 1 properties, the investors that hold the bonds, and to ensure the stories around the project don’t stop the next selling phase being underwhelmed, which could easily happen if people don’t have that most magic of things in such real estate developments: confidence. A significant suspicion of things not being right with the underlying solvency of the project would be potentially catastrophic for the Blue City. This release is clearly designed to stop the rot, and is a follow-up to the big ad placed several days ago showing pictures of the completed construction workers buildings, initial roads made, reassuring quotes from the Turkish contractors, and lots of happy workers eating lunch. News of the law suit and the squabbles between AAJH and Cyclone have, obviously, seriously concerned the bond holders, and probably some of the recent phase 1 deposit payers. Add the global financial meltdown, and the increasing competition for similar residential/golf club places, and there is clearly a significant threat to the solvency of the project which rumours had hanging by a thread anyhow with very little of the money left. The bond holders must be very, very nervous.

Hence the way this article stresses how the financing of BCC1 is independent of the shareholders. A sample:

The funding of Al Madina A'Zarqa's first phase differs greatly from other developments in the Middle East. Unlike most other real estate projects in the region, Al Madina A'Zarqa does not rely solely on the pre-sale of off-plan property to finance the development.

This provides investors and purchasers with the highest levels of confidence that the project is protected from all manners of challenge during its lifetime.

The nature of the press release can be judged on the adjectives: quote - firmly on course, progressing without delay, independent legal and financial structures, independently financed, operating independently of the shareholders, highest levels of confidence, protected from all manners of challenge, formally rated at investment grade, major international institutions … regard them as sound investment, strict loan agreement, monitoring and supervision … overseen by the Bank of New York, strict supervision of fund releases, backed by a robust and secure financial legal structure. The word Independent is used 3 times, and Supervision 4 times, in a 530 word release.

Personally, I’d feel a lot more confident hearing all this from an independent reliable auditor that I could subsequently sue in the USA. That it’s coming from the CEO of BCC1 hardly makes me think of this as a good thing. The fact that he’s doing it at all smells more like panic to me.

And I still can't believe they can get away with saying its 'just 30 mins from Seeb International airport.' How? By helicoper? An F1 car at 4 am?

More to come.

Blue City battle royale - Round 2 goes to AAJ

Muscati and Sue Hutton have posted that Cyclone's main court case against AAJH was dismissed on Monday. See Muscatis blog comments
This is really good news for Oman (and AAJH obviously), as it emphasises the independence of Omans courts, as you don't get too much more well connected as the shareholders in Cyclone LLC!

There's a lot more to come. Over the past 3 months whilst Cyclone has had the cheque book, I'm sure there has been lots of action on that account. There are already reports (Muscati again) that AAJ is counter-suing to try and get something back.

Watch this space. Round 2 may have gone his way, but Cyclone are unlikely to keep still. There's too much at stake.

Unfortunately, what the project now needs is stability and some actual construction, so they can pre-sell phase 1 and get some money back into the project. Otherwise there's a risk that the mess will make it hard to sell, and then the whole game is over as the bondholders move in...

Blue City Soap Opera breaks into the open

So, as promised yesterday, more on the soap opera that is Blue City, aka Al Madina A'Zarqa. Today Ahmed Abubaker Janahi, the Bahraini Businessman previously involved with the Blue City Project through AAJH Holdings held a press conference objecting to the fact he is now being sued in Oman.

It seems he wasn’t going off as quietly into the night as Cyclone had hoped! Holding a news conference today in Bahrain Gulf News story Mr Janahi is not a happy camper. (I blogged about him being effectively kicked out by Cyclone in December last year here.)

My sources now tell me the project may be in deep trouble, with not too much of the original $900 million left, following the need for expensive redesign of almost everything. As a result, they said the current General manager Mr Satish has been asked to go elsewhere, with an expected exit date of end March. The Chief Operating Officer, Mr Miri may not be far behind him either.
Recent speculators buying up land around Blue City may want to reconsider their somewhat precipitous investment… Looks like this story is going to run and run. I wonder who’s currently holding the bonds that effectively mortgaged the land around Al Sawadi? Is AAJH Holdings being set up to take the fall?

And I wonder if this will be reported in the Omani press, seeing as a significant shareholder in Cyclone is an 'HH' and is in the Government?

A BAHRAINI company is facing court action in Oman after its partners accused it of illegally acquiring a majority stake in a multi-billion dollar project to build an entirely new city.

However, AAJ Holdings Company (AAJHC) claims it is an unlawful attempt to force it out of the $15 to $20 billion Blue City development and is now appealing to the Omani government to intervene.

The firm owns 70 per cent of the shares in Ocean Developments, the holding company behind the project. But legal action is now being taken against it by its partner Cyclone LLC, AAJHC chairman and chief executive officer Ahmed Abubaker Janahi revealed yesterday.

He said a suit had been filed against his company in the Omani courts and claimed an injunction order had been granted, which stopped AAJHC from exercising its rights associated with shares it owns in Ocean Developments until a judgement is handed down by the court."

He said this meant Cyclone had been managing the project without any involvement by AAJHC, claiming the Omani partners had initially demanded 20pc of the Bahraini company's shares.

"An immediate intervention by the Omani government is now crucial, seeing as the minority shareholder is currently in full control of the project and has actively and independently started sales, disbursements and generating revenues - the whereabouts of which still remain unknown to AAJHC," Mr Janahi told a Press conference at the Mšvenpick Hotel yesterday.

"We have been wrongly and completely shut out with all references and our logo unduly removed from the project."

Blue City – The real story: Bahrain Businessman Ahmed Janahi Forced Out

You'll have seen the ads around for the Blue City, now of late called Al Medina Al Zarqa, a mega-development in Al Sawadi with the usual hotels, freehold apartments, golf course, marina, etc etc. Read on for the latest story surrounding this project.

Muscati recently noted Muscati's blog the very unusual letter to stakeholders that was sent on Sept 17th to investors and 'stakeholders' by Anees Issa Al-Zadjali, the CEO of Blue City Company 1 SAOC, about reports of the legal battle between AAJ Holding, the Bahrain-based originators of the scheme, and Cyclone LLC, a private company who had 30% of the action and part-owners with AAJH of the various Blue City development companies.

Cyclone is asking for a right to acquire the shares in Ocean currently owned AAJH arising from the circumstances in which the ASIT were originally acquired by AAJH. Shares in ASIT were subsequently exchanged by Cyclone and AAJH for their current holding of shares in Ocean. If the claim is successful, Cyclone will emerge as the sole shareholder in Ocean. Cyclone is an Omani company wholly owned by Omani shareholders.

It seems Cyclone was suing AAJ for all the shares, claiming AAJ were insolvent. A similar claim was made in a related US lawsuit too. Of course, claims of insolvency are a common tool of the legal process and don't necessarily mean anything real.

Dragons informants tell a different story... which may be true, or totally not true. But they are highly placed, so judge for yourself.

AAJ and their flamboyant CEO, Bahraini businessman Ahmed Janahi, were instrumental in putting the original development deal and vision together. (See a nice set of links and info on AAJ Holdings from the wonderful Sue Hutton and her non-Oman based NewsBriefsOman) AAJH organized the slightly shady financing deal that successfully raised close to US$1 Billion in capital to underwrite the $2 Billion++ Phase 1 development. You can also see in the previous link more on the strange financial group Oppenheimer Investments AG, and their no-relation-what-so-ever to the famous South African Oppenheimers, which was the basis for that other law suit in New York this year.

However, it seems that once the project was funded and clearly able to fly, the Omani shareholders in Cyclone weren't too happy giving 70% of the hopefully substantial profits to Mr Janahi.

So, my sources tell me AAJH was basically told to 'get out of Dodge' by Cyclone. They gave him a choice: 1/ To sell all his shares to Cyclone in return for just his original investment expenses, or 2/ They would use their significant connections to make sure he got nothing at all, ever. Mr Janahi is no fool, and apparently gave in to the request by choosing Option 1.

The AAJH website and the Blue City website still list Blue City as a project AAJH are involved with.

But AAJH in Bahrain told me somewhat mysteriously over the phone that (quote) 'err, no, they are no longer involved with the Blue City project in Oman'. (unquote) Which is fully consistent with my source's side of the story.

Of course, maybe it wasn't the money at all, but that Cyclone just didn't want to be associated with someone who is involved with Michael Jackson... Gulf News. It seems AAJ is quite friendly with Michael and thought he could help provide the entertainment he thinks is key to such a project. Hmmm.

The shareholders in Cyclone are apparently a member of the Omani royal family and a local business personality: see story in AMEinfo. Presumably Cyclone were able to supply the land as their part of the deal, along with a commitment from the Government to provide the significant infrastructure development essential to such a mega-project [roads, power, water, legal framework, rights for the waterfront developments].

So, Cyclone's shareholders end up with the whole deal, a checkbook with about $1 billion dollars (less the not insignificant fees of about $42million apparently paid to the financiers and all those associated with the bond deal) and can also now totally control the cashflow and all other aspects of the development. Sweet move.
Update: The member of the Royal Family (reported in AMEinfo) who owns a big part of Cyclone (and hence Blue City) is apparently HH Sayyid Haitham bin Tariq Al Said, also the current Omani Minister of Heritage and Culture. The 'prominent businessman' is as yet unidentified...

It would seem clear that the move against AAJH had the support of the highest levels of Government. I'll keep trying to get more comment from AAJH and more detail on the shareholders in Cyclone.

Background
Note the company structure for Blue is quite complicated as is not uncommon with such mega-projects.

There are the original private investment companies, AAJ Holdings and Cyclone LLC. They owned 70% and 30% respectively in Ocean Developments SAOC, who in turn own Al Sawadi Investment & Tourism Co. LLC (ASIT), Blue City Company 1 SAOC, Blue City Phase 1 Land Company Limited, and Blue City Future Phases Investment Company Limited.

AAJ Holdings Corporation (AAJ Group) AAJH was founded by Ahmed Abubaker Janahi in the British Virgin Islands as a limited liability company known as AAJ Holdings Limited (AAJHL).

AAJHL exclusively owns a Bahrain based group of companies known as AAJ Holdings Company (AAJHC), a closed shareholding company. AAJHC represents and withholds AAJ Group's interests, which are predominantly real estate focused professional companies as well as equity stakes in real estate developments.

Cyclone LLC was also involved in some fish farming and fish processing projects in Oman. As a private company with few shareholders it is very hard to get any details. Anyone who has some info on Cyclone can email the undercover.dragon@gmail.com in complete confidence.

Ocean Developments SAOG, owns Blue City Investments 1 Limited (BCI1) - the actual 'Issuer' of the bonds. The bonds are secured against the project cash flow and the land for not just phase one but other phases as well. (Exactly how that land can be used as security given Oman's strange laws on property ownership I haven't been able to find out.)

The Blue City Company 1 S.A.O.C. (BCC1) is the 'Developer' of Phase 1 of the Blue City Project by virtue of the 'Works Agreement' with the owners, and the 'Borrower' of funds (from the proceeds of the Bonds) to implement the project under an Inter-company Loan Agreement from BCI1, and it acts as the 'Employer' to the Design & Build Contractor for the implementation of the entire scope of Phase 1.

The Blue City, known in Arabic as Al Madina Al Zarqa, is a tourism and residential development being built in the Sultanate of Oman. The eventual US$ 15-20 billion project (if it gets that far!) will cover a triangular area of 35 square kilometers (14 square miles) along the Al-Sawadi coastal region. It will be a 30-minute drive from Seeb International Airport, 100 kilometers (60 miles) from Muscat and 10 kilometers from the closest town of Barka. The first phase is being built at a cost of about $2 billion. Also note that the take-over by Cyclone should not have any detrimental impact on the viability, schedule or funding of the project.