Fitch: Downgrades Blue City Investments 1 Ltd

$262.5m class A3/A4 due October 2016 (XS0267260346) downgraded to 'CCC' from 'B+'; Recovery Rating of 'RR4' assigned;

$143m class B1/B2 due October 2016 (XS0259701018) downgraded to 'CCC' from 'B-'; Recovery Rating of 'RR6' assigned;

$50.5m class C due October 2016 (XS0272445726) downgraded to 'C' from 'B-'; Recovery Rating of 'RR6' assigned;

$70m class D due October 2016 (XS0273296243) downgraded to 'C' from 'B-'; Recovery Rating of 'RR6' assigned.

The transaction is a secularization of a $925m financing package granted to Blue City Company 1 (BCC1) for the development of an upmarket residential, hotel and leisure resort on the coast of the Indian Ocean at Al Sawadi, located 90km to the west of Muscat, the capital of The Sultanate of Oman.

Demand for retail villa and apartment at integrated tourism resorts (ITRs) in Oman appears to have reduced significantly over the last 18 months, and has collapsed entirely on the project itself, with no sign of recovery in the short- or medium-term. Fitch understands that only a handful of units have been sold at the Blue City development since the start of the year.

Approximately 164 units have been sold by way of two bulk sales to property investment companies with, in one case, the entire $20m purchase price being paid upfront. Fitch understands that it remains a key strategy of BCC1 to pursue such bulk sales in the immediate future; however, it is not clear to Fitch who the bulk purchasers are, or whether bulk sales can provide the sustainable cashflow required to meet ongoing construction and financing costs. As such, Fitch does not give much weight to bulk sales in its forward-looking analysis of the transaction.

As a result of the low level of revenue collections to date, funds available in BCCI's offshore escrow account are insufficient to make construction scheduled payments owed to AECO.

Fitch understands that, in order to ensure that it continues to be paid, AECO is drawing on the $130m advance payment made to it at the time the construction contract was signed.

Fitch calculates that, if sales revenues do not significantly increase in the short term, money remaining from the advance payment will likely allow the contractor to be paid for approximately three more months. If the advance payment funds run out without a significant increase in revenue collections, it is possible that the contractor will cease work on the project, in which case a default of the intercompany loan would likely result.

BCC1 has already breached each of sales tests 1 to 4 and on the 7 November 2009 interest payment date will be tested against sales test 5 for the first time. Should BCC1 fail to meet sales test 5, which measures whether some $455m of aggregate collections will be made by that date, an immediate mandatory prepayment of the loan will be triggered. In this event the loan will be considered in default. Fitch understands that current aggregate collections stand at approximately $77m.

It is Fitch's view that without some restructuring of the loan sales test by 7 November 2009 or an increase in sales revenues to allow the project contractor, AECO, to be paid on a sustainable basis until construction is complete, a default of the classes C and D notes is inevitable in the near term.

Moreover, notwithstanding amounts escrowed to guarantee interest payments on the class A3 and B1 notes for approximately 16 and eight quarters respectively, a default of these note classes is possible once such escrowed amounts have been exhausted, which Fitch believes is likely. To some degree, the Recovery Ratings reflect the level of recoveries noteholders could reasonably expect if all amounts held in BCCI escrow accounts are used to repay the outstanding note balance immediately.