When Richard Russell, an Iowa-born businessman and a veteran property company leader in the Emirates, stepped into his new role as chief executive of Blue City Company 1 (BCC1) in 2008, he was already facing challenges on multiple fronts.
Mr Russell was in charge of the first phase of Oman's largest ever property development, Blue City, which was touted as the most significant effort at the time to diversify the country's economy away from the oil sector. Using US$20 billion (Dh73.46bn) over 20 years, the development located an hour away from Muscat would rise into a new city of 200,000 residents and introduce the tourist infrastructure needed to draw visitors from across the world, according to prospectuses created by the company.
International investors bought $925 million worth of bonds to fund the initial construction in 2006. But, by the time Mr Russell had taken the reins, sales launches and construction had been delayed by more than a year because of a complete overhaul of the masterplan. A dispute between the owners of the parent company, AAJ Holdings of Bahrain, and Cyclone LLC of Oman was threatening to derail the project.
Ian Gladwin, the Middle East chief executive of the property consultancy Cluttons, said Blue City struggled to find an identity from its inception. While the piece of land is one of the more stunning on the Oman coast, including a small fishing village and views of five islands, the massive development plans seemed to shift over time, he said. "It was never an issue of location but about the concept," Mr Gladwin said. "There was so much confusion about the project status and progress for three years. No one was sure what the identity of the project was. It was too large and unfocused."
The problems first emerged into the public sphere just a month after Mr Russell arrived at the company to replace a previous chief executive, Fari Akhlaghi. Fitch Ratings put Blue City Investments 1, a special purpose company that issued the bonds,on ratings watch with a negative outlook on July 4 2008 after BCC1 missed its first sales target. It had collected only $28m, compared with the $101m required by the bond documents.
Mr Russell pledged in an interview with The National at the time that the project would increase the number of construction workers on site to make up for lost time and meet the next target the following month on August 7. "It's a challenge," he said at the time. "It's a tight deadline but we're confident we can make it." Meanwhile, the global financial crisis was spreading. Dubai's property market started to falter. Sales slowed regionally and Blue City missed more targets.
It was then that Essdar Capital, an Abu Dhabi-backed company based in Dubai, made its first investment into the project's debt. It acquired an undisclosed number of the A1 and A3 secured bonds at a discount of between 54 and 57 per cent per cent in August last year. While the C and D class bonds were not secured, the A1 and A3 notes were backed by 25 square kilometres of land and $450m of cash held in Blue City accounts.
"I think the response is coming because for a very long time these bonds have been extremely illiquid," said Suketu Sanghvi, the senior managing director of structuring and investments at Essdar, at the time. "Many of the investors wanted to get out of this investment." By September last year, more than a year after Mr Russell arrived, the situation was beginning to look dire. The project was about to miss its fifth consecutive sales target required by the bond documents, which would trigger the mandatory prepayment of the bonds and lead to the project's closure.
During a "joint confidential meeting" at the InterContinental Hotel in London's Park Lane, Mr Russell laid out the problems in a stark presentation to senior bond holders, including Merril Lynch, Nomura, Mizuho International and UBS Investment Bank. "The project is facing difficult times on account of various factors apart from the recent negative publicity: excessive and expensive debt burden already borne by the project; inflexible construction contract; onerous debt covenants; global financial meltdown that has severely affected regional property market," according to the presentation, which was among 186 documents, reports and e-mails made public by the Blue City project last week after Essdar Capital took control of the project by acquiring 99 per cent of the senior bonds.
Mr Russell proposed to the bond holders a restructuring of the debt, reducing it by 26.9 per cent to $676.4m and extending the project completion date by seven years to 2019. But by January this year, Mr Russell's proposal had fallen flat. Blue City had ground to a halt after it failed to pay the construction company AECO Development, a joint venture between the Turkish company Enka and the Greek contractor Aktor Ate. As of last December 2, AECO had been paid $559m, according to records made available by Blue City. What cash the company had left was restricted as a guarantee for the senior bonds, meaning the project could not move forward without additional funds.
A series of e-mails and letters criss-crossed the globe as lawyers, company directors, consultants and contractors struggled to ascertain how the project would pan out after it had missed the sales targets. Anees Issa al Zadjali, the chairman of Al Sawadi Investment and Tourism Company (ASIT), wrote to the bond holders on January 25 to request an extraordinary meeting to commence with "the dissolution of the company and the filing subsidiaries". He said in the letter that the company had "lost all of its capital and have no reasonable expectation to meet their debt obligations when due".
That meeting was delayed after "certain Class A note holders requested time to present a restructuring proposal for consideration by the Blue City shareholders", Mr Russell said on March 12. Essdar Capital announced on June 9 it held 99 per cent of the A1 senior secured loans due in 2013 and A3 senior secured loans due in 2016, which it acquired at a discount of 63.03 and 62.48 cents, respectively, on the dollar.
The move could lead to the revival of the project, albeit in a different form than originally planned. Essdar has taken "significant control over decision making on the project", said Mr Sanghvi. The focus will be tourism, he said. "Within the 20 years, what should come first and what should come next is what will be discussed to a larger extent," he said last week. "If you look at the tourism and hotels project in Oman, they are actually quite healthy. Occupancy rates are very high in and around Muscat."
bhope@thenational.ae
