Oman's Blue City project falters
ABU DHABI // Blue City, Oman's largest property development, appears to be facing serious challenges after an insurance company announced it had increased its loss provisions to cover the project's possible collapse. Axis Capital, an insurer and reinsurer, said in its fourth-quarter earnings last week that it had increased its provisions for the project to an extent the company believes "will be sufficient to bring finality to our involvement".
A subsidiary of Axis provided a 100 per cent credit insurance policy for US$399 million (Dh1.46 billion) worth of bonds that Blue City issued to finance construction. A total of $925m worth of bonds were issued. The immense Blue City project was Oman's answer to the booming property markets of Dubai and elsewhere in the Gulf. By far the largest master development launched in the country, original plans show a 32-square-kilometre city built over 20 years at a cost of an estimated $20bn.
The first phase, on a 2.2 sq km piece of land, would bring five-star hotels to the coast near Muscat and create housing suitable for the growing Omani population and expatriates looking for holiday homes. The project was eventually to include hospitals, schools and entertainment facilities for 200,000 residents. But Blue City, also known as Al Madina A'Zarqa, hit stumbling blocks from the start and the project has become a focal point in the Oman property downturn.
Among the biggest challenges for the company is a legal dispute between two shareholders, AAJ Holdings of Bahrain and Cyclone of Oman, over ownership of the company. "I think the biggest problem with this project was the shareholder litigation," said Suketu Sanghvi, the senior managing director of structuring and investments at Essdar Capital in Dubai. "It caused them to miss the bull run in the regional property market that was going on. Nobody will buy off-plan any more."
Mr Sanghvi's company, nonetheless, acquired a substantial portion of the top-class bonds for Blue City at steep discounts last August and September. He said the owners of Blue City were trying to restructure the project and there would be more clarity about its future in two months. "Nothing has moved since October," he said. "We are quite hopeful that things will move a little bit faster." The area has potential to move forward as a smaller tourist destination, Mr Sanghvi said.
Sales have also been under the targets set in the original bond documents. As of August 1, Blue City had sold $53.9m worth of units, well short of the $639m it expected to have sold. This prompted Moody's Investors Service and Standard & Poor's to downgrade the bonds last year. Moody's lowered the credit rating on about $399m of senior notes from the company to "Ba1" from "Baa3" because of "worse than expected transaction performance and a less favourable macroeconomic environment".
These are the same notes that are insured by Axis Capital. The "A1" and "A3" notes are also backed by about $250m in cash locked in an escrow account and by land. Fitch Ratings downgraded four other classes of notes, worth $526m, citing the deterioration of Oman's property market. "Demand for retail villa and apartment at integrated tourism resorts in Oman appears to have reduced significantly over the last 18 months and has collapsed entirely on the project itself, with no sign of recovery in the short or medium term," Fitch said at the time.
Executives from Blue City declined to comment yesterday. @Email:firstname.lastname@example.org
Updated: February 18, 2010 04:00 AM