Fitch Ratings has assigned the Jebel Ali Free Zone FZE (JAFZ) a long-term issuer default rating (IDR) of ‘B’. The IDR is initiated on Rating Watch Positive (RWP), pending conclusion of the current refinancing.
A successful conclusion of the refinancing as discussed below would result in an upgrade to ‘B+’ with a stable outlook.
Fitch has also assigned an expected rating of ‘B(exp)’RWP to the proposed Sukuk which is to be issued by JAFZ Sukuk (2019) Ltd. Final instrument ratings would be contingent upon the receipt of final documentation conforming materially to information already received. This rating is also initiated on RWP, reflecting the fact that the successful issuance of these certificates would see a final rating of ‘B+’ assigned, should the amount, terms and conditions of the certificates conform in all material respects to the information previously provided to Fitch.
The refinancing is designed to address the maturity of a Sukuk due in November 2012. JAFZ has a facility mandate that has been signed with a consortium of banks in order to refinance a significant portion of the maturing Sukuk, which will be complemented with a new Sukuk.
“The rating reflects the fact that JAFZ-based company activities are one of the significant contributors to Dubai’s economy (currently approximately 20% of Dubai’s GDP) and the fact that they represent a key driver for the development of the trade and transport industries in Dubai,” Bashar Al Natoor , Director in Fitch’s EMEA Corporates team in Dubai, said.
JAFZ maintains a diverse portfolio of tenants in terms of industry sector and geographic base segments. Top 10 customers represented around 10.4% of revenue and the top customer represents less than 3.0%. However all of JAFZ’s operations are based in Dubai which entails a high concentration risk.
Fitch takes comfort from the fact JAFZ’s rentals and revenues from administration of real estate have held up relatively well in the past three years despite Dubai’s challenging real estate market conditions. JAFZ also maintained satisfactory occupancy rates – almost 79% of leasable land, 90% of warehouses, 78% of offices and 88% of onsite residential accommodation (OSR) were occupied as of 31 December 2011.
JAFZ’s rentals are driven by land rent that constitutes almost 40% of its total rental income and have a lease term of about seven and a half years on average and a high renewal rate, with 80% of companies established in the free zone before 2006 still operating there. The other 60% of rents are, however, contracted for a one-year term. As a result, rental contracts representing almost two-thirds of rental income expire every year.
The rating is constrained by the company’s high leverage debt/EBITDA and weakening EBITDAR net interest coverage, mainly driven by the increased refinancing cost under the new structure. Whereas typical property investment companies reduce leverage by selling assets, JAFZ must generate free cash flow to repay debt, as JAFZ does not own its real estate assets, but was granted a usufruct right and concession by the Jebel Ali Free Zone Authority which matures in 2106.
Fitch notes that JAFZ is in an advanced stage of the refinancing its existing Sukuk which is scheduled to mature in November 2012. The company’s profile will be materially affected by the success or failure of the proposed bank refinancing and Sukuk issue. Fitch notes JAFZ’s improving debt maturity profile under the proposed refinancing. Nevertheless, based on the Fitch rating case and liquidity analysis, the company’s liquidity profile suffers from the lack of long term committed undrawn facilities and will largely depend on the amortization schedule of the loan facility.
Failure to conclude the refinancing on substantially the same terms and conditions as those which have been provided to Fitch would likely result in the downgrade of the IDR (‘B’) and the removal of the RWP.