Fitch Ratings has affirmed Jebel Ali Free Zone FZE's (JAFZ) Long-term Issuer Default Rating (IDR) at 'B+', with a Stable Outlook.
Fitch has also affirmed JAFZ Sukuk (2019) Limited's senior secured rating of 'B+'/'RR4'.
On 11 June 2013, Brookfield Asset Management announced the acquisition of EZW Gazaley LTD from Economic Zones World, part of Dubai World.
Under the provisions of JAFZ's AED 4.4 billion ($1.2 billion) Islamic facility, a guarantee was provided by EZW and linked to the completion of a full or partial disposal of Gazeley, which would lead to a mandatory prepayment but limited to greater of $300 million or two thirds of net cash proceeds.
EZW will be making an initial pre-payment of AED1bn on 19th June 2013. This pre-payment is in line with the guarantee given by EZW under Islamic Facility Financing and it represents 90 per cent of the guaranteed amount of $300 million.
The agency notes the positive impact the sale of Gazaley will have on JAFZ's capital structure, liquidity and debt serviceability. However, it was expected and was considered in JAFZ 's current rating, giving the current rating level more headroom.
Significant Contribution to Economy: The rating reflects the fact that JAFZ's activities are important to Dubai's economy, accounting for approximately 20 per cent of Dubai's GDP, and the fact that they represent a key driver for the development of trade and transport. However all of JAFZ's operations are based in Dubai which entails a high concentration risk.
Stable Performance: JAFZ's rentals and revenues from the administration of real estate have held up relatively well in the past three years, despite Dubai's challenging real estate market conditions. JAFZ has also maintained satisfactory occupancy rates. Almost 77 per cent of leasable land, 90 per cent of warehouses, 87 per cent of offices and 84 per cent of onsite residential accommodation were occupied as of 31 December 2012.
Dependent on Dubai: JAFZ's business tends to be less volatile and sensitive to asset bubbles than the broader Dubai office market. JAFZ's performance is correlated to the general level of activity in Dubai, which is itself dependent on the health of the regional and global economies as well as regional political stability. Fitch is concerned by the large and increasing supply of rental properties in the free zone sector.
Improving Liquidity and Debt structure: Fitch upgraded JAFZ's Long-Term IDR to 'B+' from 'B' in June 2012 with a Stable Outlook. The upgrade reflected the successful completion of the sukuk offering and bank refinancing, which addressed the refinancing of a sukuk due in November 2012.
The agency notes the positive impact the sale of Gazeley will have on JAFZ's capital structure, liquidity and debt serviceability, which was anticipated and part of the financing agreement. However, it was expected and was considered in JAFZ's current rating, giving the current rating level more headroom.
Whereas typical property investment companies reduce leverage by selling assets, JAFZ must generate free cash flow to repay debt, as it 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.
High leverage is a Rating Constraints: The rating is constrained - although improving - by the company's high leverage debt/EBITDA and moderate EBITDAR net interest coverage. With Fitch projected debt/EBTIDA above 4.0x and EBITDA/interest expense remaining below 2.5x during the projected period.
Deleveraging Ability: Ability to undertake investment and asset disposal plans leading to significant deleveraging could be positive for the ratings.
Worsening Market Conditions: Worsening market conditions that negatively affected cash generation ability and deleveraging plans could be negative for the ratings.
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