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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
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
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.
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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