More on Oman's Blue City
An ambitious capital markets financing backed by exposure to Oman’s massive Al Madina al Zarqa (Blue City) project was roadshowed last month by Bear Stearns and Standard Chartered. The $900 million Blue City Investments transaction is unusual in that it not only incorporates construction risk but also a provision that repayment of the notes is dependent on future residential sales of the properties to be constructed.
The whole Al Madina al Zarqa project envisages the creation of a completely new city in Oman covering 34 sq km of coastal land. It is one of the first large-scale efforts by the sultanate to expand the tourism and leisure sectors and ultimately reduce dependence on the oil and gas industries. Twenty-five sq km (covering phases 1 to 10 of the project) has been transferred by the government of Oman to form part of the security package for borrowers.
The risks to investors boil down to the fact that the properties have yet to be built and therefore will not be cash generative for some time and, secondly, that ultimate demand for the properties is difficult to measure because tourism in Oman is still in its infancy. These risks are addressed in the structure by a series of escrow accounts and reserve funds, $134 million of which will be drawn down over the first 15 months of the transaction. There are also stringent sales and capex tests, which stipulate a maximum permitted deviation of actual performance from the business plan. A breach of these tests can result in the immediate enforcement of security over the intercompany loan.
A financial model covering expected costs and sales assumptions has been drawn up based on figures provided by Al Sawadi Investment & Tourism Company (ASIT), the project developer. It has been independently reviewed by PriceWaterhouseCoopers. The accuracy of this model is fundamental to the success of the deal, although the project’s breakeven point lies substantially below business plan projections.
The Blue City Investments transaction itself incorporates three tranches of notes issued by Cayman Islands-based Phase 1 Cayman HoldCo: a $399 million A1/A2 senior tranche, which is insured by Bermuda-based multiline credit insurer Axis Specialty. Beneath this there is a $262 million triple-B minus rated A3/A4 tranche. The initial proposal involved a further $263.5 million double-B rated B1/B2 tranche but initial reaction prompted the tweaking of the structure to add a C1 tranche and reduce the size of the double-B segment. The B1/B2 tranche is now roughly $190 million in size and the balance has been taken as the C1 note by ASIT-owned real estate development and investment company AAJ Holdings, the main sponsor of the project. The additional subordination might have been added because of investor concern about the ability of the structure to circumvent Omani enforcement procedures. Realizable recoveries and timing under onshore enforcement are extremely uncertain.