Essdar sees Oman Blue City revamp after debt buy

Essdar Investments Ltd, a fund backed by Abu Dhabi’s ruling family, plans to exercise “significant control” over Oman’s stalled Blue City development after agreeing to buy $655.5 million of bonds that financed the project.

The investment is “a bet on the long-term development of such projects in Oman,” Essdar Capital’s senior managing director, Suketu Sanghvi, said in a phone interview from London on Wednesday. Essdar will push to accelerate development on the tourism and hotel components of the project since they better fit current market demand, he said.

Essdar, the Cayman Islands-based partner of Dubai-based Essdar Capital Managers Ltd, will hold 99 per cent of two notes sold in 2006 by Oman’s Blue City Investments 1 Ltd following a tender offer that closed on June 7, it said in an emailed statement from Dubai on Wednesday. The notes, bought at a 37 per cent discount, had a combined $661.5m of outstanding principal as of November 7, 2006, the company said.

Blue City, an hour’s drive from the capital, Muscat, was supposed to include more than 200 villas, 5,000 apartments, four hotels, two golf courses and a clubhouse, according to the prospectus for the bonds. A total of $925m was raised from bondholders to finance construction, which started in 2006.

The $20 billion project at the heart of Oman’s economic transformation plans missed sales targets as real estate speculators left Middle Eastern markets and a legal battle between the project’s owners undermined confidence.

Essdar said on Wednesday it will pay $630.3 per $1,000 for $399m of outstanding Class A1 notes due 2013 and $624.8 per $1,000 for $262.5m of Class A3 notes due 2016.

Blue City has 45 cents to the dollar of cash in reserve for bondholders and 25 square kilometers of land, which helps reduce risk. An ownership dispute between the company’s biggest shareholders is expected to be settled by Oman’s supreme court shortly, he said.

Oman, a Gulf country of about 3 million bordered by the United Arab Emirates, Saudi Arabia and Yemen, is heavily dependent on dwindling oil reserves. Its Vision 2020 plan aims to reduce the contribution of crude oil by developing industries such as tourism.

Blue City’s business model was to keep building with the purchase payments received and there are no buyers while those that did buy are no longer paying, so there’s no cash flow, Dubai-based Khalid Howladar, senior credit officer at Moody’s Investors Service, said in a May 5 interview. As of November last year, only $75m worth of sales had been made, compared with a forecast of $860m, according to Howladar.