Black cloud hangs over the future of Oman's Blue City

The country's largest property development could face liquidation.

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."

The ASIT letter prompted the Bank of New York Mellon, the issuer of a US$925 million (Dh3.39 billion) bond that Blue City was to use for the first phase of construction, to send out a notice to all bondholders informing them of the "proposed dissolution of the borrower". The bank said Blue City had failed to make interest payments to Class C and D bondholders last November and that it had entered negotiations with Class A bondholders to restructure its obligations.

The liquidation proposal is only the latest indication of trouble at the project. Moody's Investors Service, the ratings agency, downgraded $399m of Blue City's A1 senior secured notes to "high credit risk" last month, citing the project's dimming prospects. "The performance of the underlying development project has further deteriorated and remains well below Moody's expectations, with little prospect of near-term recovery given the continued stagnation of the regional property markets and the delays accumulated to date," Moody's said.

Axis Capital, the company that provided a 100 per cent credit insurance policy for the A1 notes - said in its fourth-quarter earnings announcement it had increased its loss provisions to cover a possible failure of the project. "Our results incorporated reserving provision for the Blue City project, which we are comfortable will be sufficient to bring finality to our involvement," said John Charman, the chief executive of Axis Capital.

Axis has alleged that Blue City had "been a breach of warranty", and that it was not responsible for providing cover, the letter from the Bank of New York Mellon said. Blue City, also known as Al Madina A'Zarqa, was launched as Oman's first major foray into large, master-planned property development. The original plans for the 20-year project showed a new 32 square km city with hotels, schools, apartment buildings, villas and recreation areas.

Construction had already begun on the first phase of the site, a 2.2 sq km piece of land near the coast. The land was provided by the government of Oman. But the project has faced challenges from the start. Its two shareholders, AAJ Holdings of Bahrain and Cyclone of Oman, have been in a legal dispute over ownership of the company for years. And Blue City has missed consecutive sales targets required by the bond financing the first phase of construction.

Moody's said that as of last November, Blue City had a total of $74.6m of sales compared with a target of $860m. The failure to meet the target "should have triggered a mandatory prepayment of the inter-company loans", Moody's said, but there had been no announcement about this from the company. [e-mail]