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.

Draconian debt laws in the UAE. A Tale of Warning - Part Two

Continued from Part One.

Effectively imprisoned in the UAE because of an exit ban imposed by his bank, and facing both the removal of his work permit, illegal status, and jail for being in debt, our correspondent makes a big decision: to leave the UAE and come to Oman, illegally.

His story continues...

PART TWO: The Escape

...
I decided I had to get out. I found someone who could facilitate this and paid a lot of money to be brought over the border into Oman.

I have seen the [UK] embassy who have said they cannot directly help me as I am illegal, the lawyer said the same, but I feel in the circumstances I would have hoped to be helped to get home to the UK. I did not expect to left in limbo. I am fully aware that I must spend some time in jail here and pay a fine but I just want a guarantee I will be returned to the UK after I have paid my dues to the Omanis.

I am running out of money, scared that if I am returned to the UAE I am going to spend more than a year in jail for 9000 dirhams which I paid and basically be a victim of a barbaric system with no support or influence from the embassy there.

Photo: Getting illegally from the UAE into Oman can be bought.


So, despite an Omani Government amnesty for illegal aliens (just extended for two months), it seems the British Embassy wouldn't help him get back to the UK.

Running out of money, he made the fateful decision to try to get a flight out...

At the check-in desk he was detained by the Omani authorities, arrested, and unfortunately, deported straight away back to the UAE.

He is now in Dubai prison.

Photo: Dubai Central Prison. Easier to see than you'd think...


As you might imagine, there's no internet where he is now, and he can only communicate through his lawyer. He's facing at least a year in jail, followed by deportation.

The lesson?

If you are an expat in the UAE and have debts you can't repay, and if you seem to be about to loose your job, the only sensible thing to do is to leave the UAE fast, via the airport, before you get slapped with a travel ban.

And wish the place good riddance.

Otherwise you will be imprisoned in horrible conditions in a Dubai jail, probably for months and possibly for years.

Such is the state of the law in the UAE. I fail to understand why tourists risk their lives even visiting the UAE, let alone working there. For example, The man who got 1 month for giving the bird, or many other cases of arrest and imprisonment for trivial or even non-sensical offenses. (hey, at least in Oman its only 2 weeks in prison for flicking the bird!! Go Oman!)

"One bloke was arrested for doing press-ups on the beach - cops accused him of making love to the GROUND and charged him with indecency."

What I don't understand is why our illegal alien wasn't helped by the British Embassy.

Also, paying to get to Oman is probably a waste of time, unless perhaps you then can arrange for someone to take you on a boat across to India.


In Part Three, the tale of an Omani-based expat who was arrested while visiting the UAE on a shopping trip, charged (falsely) with having a minor debt-charge. Her tale is really harrowing.

Draconian debt laws in the UAE. A Tale of Warning - Part One.

The UAE, and Dubai in particular, still peddle a life style vision of hedonistic pleasure to foreign expats (when not busy arresting and imprisoning them for saucy things like kissing and texting).

Middle talented service sector Brits, for example, seemed to be able to come over and live the lifestyle: posh new flat, new car, no taxes, and loads of relatively cheap restaurants, bars and nightclubs.

Bright Lights. Bright Opportunities!! From http://makkah.files.wordpress.com


They work in publishing, marketing, sales, account management, promotions, advertising, real estate.... Yeah, all those areas of employment heavily hit by Dubai's meltdown.

The problem is a lot of them believed the hype. They found themselves spending all that money on rents, loans to pay the rent in advance as demanded, car loans, going out. You know.

Then they got into the credit cards and personal loans too. Maybe even bought a place off plan. Ooops.

The UAE response to debt: Stop, Go to Jail. Go directly to jail. Do not pass go. Do not collect $200.


When such people get laid off, a whole new lifestyle kicks in. The UAE don't have a personal bankruptcy law, you see. And if you can't get another job to service your debts, the banks you owe money to can (and do) block your right to leave the country. If you can't pay your debts you get thrown in jail, for quite some time.

See the story of the guy who escaped by boat to India, and the facts about debt in Dubai

"Welcome to Debt City". By Tom Huntley
...
Ford also left behind an anguished “open letter” to friends and creditors that neatly encapsulates the predicament of many expats in Dubai who took out loans during the flush times and now find themselves out of work and unable to keep up with the payments on their seaside villas and luxury cars.

“I am not running away from debt, I am purely protecting those dearest to me and getting out of a country which, due to the lack of structured bankruptcy laws and a banking system which has zero flexibility on loan repayments, drives people to make horrible decisions,” he wrote in an open letter to local media.

He promised to repay all of his creditors.

Dubai authorities won’t say precisely how many people have been jailed for their debts, but local news accounts put the number at about 1,200 — more than 40 percent of the total prison population.

Even trickier to gauge is how many others took Ford’s route and simply fled. Judging by the number of apparently abandoned BMW’s and Mercedes gathering dust on city streets and the ensuing chatter on expats’ discussion boards, the number is not insignificant.

This situation has created a whole subclass of expats in the UAE who are in the hole (only a little bit, say $15k), unemployed, and therefore desperate. Hey, OK, so the banks lent them money. But 2 years in prison? How does that help pay their debt anyhow?

UAE Ministry of Tourism Photo: Everyone agreed the Ministry's new expat marketing campaign - though true - wasn't going to work.


So here's the sort of thing that's going on, and worryingly, Oman and our expat Governments' Representatives seems to be assisting the UAE to continue to imprison minor debtors.

Here's a cautionary tale folks. It's a true story. Some names have been changed.

PART ONE: The Fall From Grace

Dragon,
...
Roughly 5 months ago, NBD (National Bank of Dubai) put a case against me for missing 2 payments on a loan, this was due to loosing my job, as so many other people when the credit crisis hit. I was working in a construction related job.

I never once broke contact with the bank and as far as I am aware I would only be in serious default for missing 3 payments. I found another position and continued to pay, even paying a little more so I would eat away at the arrears and showing a determination to resolve my problem.

When NBD joined with Emirates Bank that they applied the case [law], this meaning a travel ban. They informed me of this situation by text message, not by letter or call..the arrears totalled 9000 dirhams which I paid immediately, therefore having a normal running loan account.

They insisted I have my salary paid into NBD but this was a problem due to commitments to Citi Bank ...

As time went on the [new] company I was with had difficulties, and a number of us where let go. But they also requested the residence visa back. This would have meant I could not go to the border to get a tourist visa due to the [travel ban], therefore I would eventually over stay, making it impossible to get another job with residency as all over stayers must be cleared and therefore I would be arrested.

Also as I must be a residency holder to have the loan in the first place, another reason I would not be able to clear the [travel ban]

So no matter what, he's screwed and will be arrested and put in jail for a debt - in this case - he was up to date with repaying!! What can our poor UAE expat do? What would you do?

These UAE laws are monstrous and barbaric. People guilty of nothing more than doing what was expected and encouraged by the Dubai authorities are being sent to prison in droves. With NO intervention by their embassies.

Why? In the west this would NOT be a cause for prison, but a negotiated settlement with creditors. Just like other bankrupt people or corporations (like Dubai World & Nakheel perhaps?) it's just a negotiation. It's not like the banks thought an expat Nakheel marketing guy was 'sovereign backed' when they loaned him money either, eh, Sh. Maktoum?

Coming in Part 2: The Escape... to Oman

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.