Essdar Capital, an Abu Dhabi-backed firm, sold its bond investments in the troubled Blue City project to an Oman government-controlled fund.

In a statement on Wednesday, Essdar, 35-percent owned by the ruler of Dubai's investment company, Dubai Holding , said it sold 100 percent of its holdings of Blue City's Class A notes to an undisclosed party.

The company did not disclose a value for the deal.

Separately, Onyx Investments, fully-owned unit of state-owned Oman Investment Fund, said it bought Class A senior notes issued by Blue City without disclosing a value.

Essdar bought Blue City's $655.5 million Class A debt via a tender offer in June last year as part of investment in its Gulf-focused distressed debt fund.

The investment was the firm's largest to date and was made at a price of 62-63 cents to the dollar. Essdar will now focus on launching its second fund, said Suketu Sanghvi, head of structuring and investments at the firm.

"We are happy with the deal and will be looking at our second fund very closely," Sanghvi told Reuters.

Distressed debt investors normally buy debt of troubled companies at a discount and aim to make money by restructuring their operations and liquidating the debt at par.

An hour from Oman's capital of Muscat, the $15 billion Blue City project was touted as Oman's biggest real estate project.  It stalled amid dismal sales and clashes between shareholders.

The 20-year project, which was to be built in 12 phases, was expected to have a population of 200,000 when completed.

Blue City issued $925 million worth of bonds in November 2006 and these were divided into four categories -- A, B, C and D -- which are in descending order of asset security.

The two bonds were downgraded in July 2009 to near-junk status, with ratings agencies warning the value of Blue City's property sales had fallen dramatically with no sign of recovery in the short to medium term.

Essdar bought the debt through its affiliate, Essdar Investments Ltd. - Reuters