Blue City on the ropes

Blue City, Oman's largest and most ambitious property development, is looking increasingly tenuous as it struggles with an ownership dispute, low sales and repeated failures to meet milestones set out in its bond prospectus. Last week, we wrote about how Axis Capital - the insurer of $399 million worth of A1 senior secured notes issued by Blue City - had written off an undisclosed amount in the fourth quarter that the insurer said would be "sufficient to bring finality to our involvement" with the project.

Moody's Investor Service announced yesterday that it was downgrading those same A1 notes to B3 and placed under review for possible downgrade. The notes had been downgraded on July 14 to Ba3 from Ba1. B3 is classified by Moody's as "speculative" and "subject to high credit risk".

Here is the rationale from Moody's:

<i>"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 regional property markets and the delays accumulated to date. Despite the recent initiatives by the company management in terms of sales and marketing, the net proceeds from sales of residential units amounted as of November 2009 investor report, to <b>USD 74.66 million versus targeted sales of USD 860 million</b>. As a result, the residential sales tests 1, 2, 3 and 4 have been failed and stand at 8.68% versus the threshold ratio of 87.5% for residential sales test 1, 82.5% for residential sales test 2, 80% for residential sales test 3 and 75% for residential sales test 4."</i>