x Abu Dhabi, UAEMonday 24 July 2017

Omani investors shed Blue City bonds

Essdar Capital's bid to buy bonds related to the troubled Blue City property development in Oman is receiving a "strong response from the market".

ABU DHABI // Essdar Capital's bid to buy bonds related to the troubled Blue City property development in Oman is receiving a "strong response from the market", with many holders accepting a 50 per cent discount on their bonds, a top executive says. The fund is trying to obtain at least 75 per cent of two classes of bonds for the project in a "high-risk, high-return strategy", said Suketu Sanghvi, the senior managing director of Essdar.

"I think the response is coming because for a very long time these bonds have been extremely illiquid," Mr Sanghvi said. "Many of the investors wanted to get out of this investment." The arrival of Essdar Capital comes just weeks after Moody's Investors Service and Fitch Ratings downgraded Blue City's bonds to near junk status. Executives at Blue City declined to comment yesterday. The project is the largest under development in Oman and involves building a city about 45 minutes north-west of Muscat.

Under the original plans, the US$20 billion (Dh73.46bn) development would include hospitals, schools and entertainment facilities for 200,000 residents by the end of its 20-year construction process. With Oman's oil supplies dwindling, Blue City was part of the country's efforts to diversify its economy into new areas such as tourism. It was also an attempt to provide locals with more housing, which is in short supply.

But Blue City has been plagued by problems since its launch in 2006. A protracted legal dispute between two shareholders, AAJ Holding of Bahrain and Cyclone of Oman, over the ownership of the company is continuing. And sales have been under the targets set in the original bond documents. As of August 1, Blue City had sold $53.9 million worth of units, far short of the $639m it expected to have. This prompted the ratings agencies to downgrade the bonds last month.

Moody's said it was lowering 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". Fitch Ratings downgraded four other classes of notes, worth $526m, to "CCC" and "C" from "B plus" and "B minus", 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 in a statement.

The agency said sales were so slow that there was not enough money to pay the construction contractor, AECO, and if "revenues do not significantly increase in the short term, money remaining from the advance payment will likely allow the contractor to be paid for approximately three more months". But Mr Sanghvi said Essdar Capital saw a high potential to make a return on the bonds, in part because the Omani tourism sector was growing.

"The good thing about this project is the tourism element," he said. "We do believe in the story of tourism in Oman." The A1 and A3 bonds that Essdar is trying to acquire are also backed up by a cash deposit and land, which could be liquidated in the worst case scenario, Mr Sanghvi said. The bonds represent about $661.5m of a total of $925m raised in the original bond offering. Essdar is trying to buy the A1 bonds at a discount of between 29 per cent and 50 per cent, and the A3 bonds at a discount of between 37 per cent and 50 per cent.

The goal, Mr Sanghvi said, was to obtain at least 75 per cent of the bonds so that Essdar Capital would have the majority of the voting rights to put it in a position of power when it comes to changing the terms of the bond, or deciding what to do if the company cannot meet its obligations. bhope@thenational.ae