Blue City takes a hit from Moody's

Moody's Investor Service, the ratings agency, has downgraded the top class of bonds for the Blue City project in Oman.

Blue City, the largest property project in Oman, has suffered another blow this week with Moody's Investors Service downgrading US$399 million (Dh1.46 billion) of its bonds to "high credit risk" status. Moody's said the first phase of the project on a 2.2 square km site near Muscat was behind schedule and would struggle in the depressed regional property market in the year ahead.

Moody's downgraded the bonds from "Ba3" to "B3", which it defines as "speculative" and "subject to high credit risk". "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," the agency said. Blue City issued a $925m bond to finance construction of the first phase of the project in 2006, of which $399m were "A1" senior secured notes that are rated by Moody's.

But the project has been hampered by an ownership dispute among its shareholders and an inability to meet sales targets set out in the bond prospectus. Moody's said that as of November last year, 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 has been no announcement about this from the company.

Richard Russell, the chief executive of the first phase of Blue City, did not respond to a request for comment sent by e-mail. This month, Axis Capital - the company that provided a 100 per cent credit insurance policy for the "A1" notes - said in its fourth-quarter earnings announcement that 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," John Charman, the chief executive of Axis Capital, told analysts.

The planned Blue City, also known as Al Madina A'Zarqa, would have transformed a 32 sq km area on the coast into a new city with hotels, schools, apartment buildings, villas and recreation areas. The $20bn project would have been built over 20 years and included housing for as many as 200,000 residents.