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Rating Action:

Moody's Downgrades Notes Issued by Blue City Investments 1 Limited

19 Nov 2008
Moody's Downgrades Notes Issued by Blue City Investments 1 Limited

USD 399 million of debt securities affected.

London, 19 November 2008 -- Moody's Investors Service announced today the downgrade of one Class of Notes issued by Blue City Investments 1 Limited (the "Issuer"):

- USD 399,000,000 Class A1 Floating Rate Senior Secured Unrestricted Notes due 2013, current rating: Baa3, downgraded to Ba1 and on review for possible downgrade.

Date of previous rating action: No previous rating action since definitive rating assignment on 14 March 2007.

This transaction is the securitisation of a real estate and hotel development project in the Sultanate of Oman, the Blue City. The Notes issued under this transaction will finance the first phase of a major project, the development over the next 20 years of an entirely new city, located not far from the Omani capital Muscat on the Indian Ocean coast.

The Class A1 Notes has the benefit of a credit insurance policy provided by AXIS Specialty Limited ("Axis") (A2) covering 100% of the principal of the Class A1 Notes. The insurance policy is not an unconditional guarantee and the task to demonstrate that a claim is valid lies with the insured party, i.e. the Issuer. The rating on the Class A1 Notes reflects the combined risk on the underlying project (i.e. excluding support of the insurance policy) together with a non-payment under the credit insurance policy.

The rating action was prompted by the worse-than-expected transaction performance and a less favourable macro economic environment. Moody's rating action is based on the information made available through investor reports as well as discussions with the project company and the technical advisor of the project. The net proceeds from sales of residential units amounted as of August 2008, to USD 30.6 million versus a target of USD 101.0 million. As a result, the residential sales test 1 was at 30.3% versus the threshold ratio of 87.5% for that period. The fact that the sales revenue is far below expectations can jeopardize the overall project as the borrower may find it difficult to continue funding the construction in the longer term.

Given the uncertainty on the capacity for the project to speed up the sales process, the Class A1 Notes will remain on review for possible downgrade. Indeed, despite the recent initiatives of the new management in terms of sales and marketing strategy, the current level of sales revenue of USD 30.6 million (as of the latest investor report) is far below the budgeted sales revenue for the November 2008 payment date of USD 186 million. Therefore, there is uncertainty whether the new sales and marketing initiatives will be sufficient to increase sales collections to a level sufficient to pass the residential sales test 2. If a residential sales test (there are six throughout the life of the transaction) is breached, the borrower (Blue City Company 1 S.A.O.C.) may cure the breach by selling certain non-residential assets within a certain period of time from such breach or obtaining equity injections or shareholder loans from its ultimate shareholders. In respect of the residential sales test 1 and 2, if both the sales test and the capex test have been breached and the borrower does not cure the breach, a loan event of default will have occurred. The capex test measures the borrower's actual capital expenditure compared to the budgeted capital expenditure. The capital expenditure test 1 has been passed as of August 2008; it stood at 70.8% compared to the threshold ratio of 107.5%. Moody's notes that the 1 year delay had a positive impact on the capex requirement for the project, nevertheless in the longer term there remains some uncertainty on how the capex initially anticipated would be funded should sales remain below the initial targets.

Moody's understands that the sponsors of the transaction, AAJ Holdings Company B.S.C. ("AAJ"), a Bahrain-based real estate development company, and Cyclone LLC ("Cyclone"), an Oman-based company are in dispute. This may affect the timely and effective intervention of the sponsors to step in and assist the borrower. In addition, the local and global real estate markets, the lack of liquidity and the state of the global economy can affect the sales revenue going forward, especially in light of the scale of the scheme and the lack of any present infrastructure.

Moody's aims to complete the rating review after receipt of the next investor report expected within the next two to three months. Moody's would also like to receive further information on buyers' payment schedule and in general the company's plan to improve the transaction's performance.

The rating addresses the expected loss posed to investors by the legal final maturity. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.

Moody's has analysed and monitors this transaction following the methodology for EMEA ABS as described in the Report: Proposal to Incorporate "Joint-Default Analysis" into Moody's Rating Methodologies, December 2004.

Moody's will continue to monitor the transaction on an ongoing basis. For detailed performance information, please see Moody's Performance Overviews available to subscribers on www.moodys.com.

Frankfurt
Marie-Jeanne Kerschkamp
Managing Director
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Panayiota Koulafetis
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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