Moody’s Investors Service has today downgraded by one notch to B2 from B1 the long-term foreign and local currency issuer ratings of Jebel Ali Free Zone FZE (“Jafz”) and converted them into a corporate family rating (CFR) and a probability of default rating (PDR), in line with Moody’s policy for non-investment-grade corporate issuers. The downgrade to B2 also applies to the AED7.5 billion trust certificates that are due in November 2012 and issued by JAFZ Sukuk Limited. The outlook on all ratings is negative.
Moody’s decision to downgrade Jafz was driven by the high uncertainties over the near- to medium-term evolution of the company’s capital structure, which the rating agency assesses as being highly leveraged, with adjusted debt to EBITDA at 8.6 times (as per the 12-month period ending June 2010), and as unsustainable given the company’s cash flow profile. Moreover, Moody’s considers it likely that the company’s capital structure will remain constrained. These factors have prompted Moody’s to reposition Jafz’s baseline credit assessment (BCA) to 16 (equivalent to B3 on Moody’s global scale) from 14 (B1 equivalent), hence the downgrade.
In addition, Jafz will have to raise additional funds in order to carry out its capex programme, which leads Moody’s to expect that leverage will remain at highly elevated levels of above 8x this year, and that the de-leveraging trajectory will be slower than previously expected. Furthermore, the current BCA incorporates the risk linked to a refinancing of the sukuk at higher debt cost, which could impact profitability, cash flow generation and interest coverage. However, Jafz’s BCA continues to rely on its inherently strong business model, which in turn rests on a large pool of rental contracts with diversified tenants that exhibit high occupancy levels and, to date, low churn rates. Although operating margins contracted slightly in 2009 due to higher utility costs, which are likely to persist with the recent DEWA tariff increase, Moody’s believes that Jafz will manage to maintain EBITDA margins well above 60%.
The CFR of B2 benefits from a one-notch uplift as Moody’s can envisage scenarios under which the government of Dubai would extend extraordinary support to Jafz in order to assist with refinancing its maturing obligations as Moody’s is of the view that the operating assets of Jafz are strategically important given its location and importance to the local economy. Nevertheless, Moody’s assesses the likelihood of support as low given uncertainties about the capacity to support. The rating agency’s low support assumption is also based on the indirect full ownership of the government.
The negative rating outlook mainly reflects the refinancing risk attached to the debt that matures in November 2012, along with the continued uncertainties within the Emirate of Dubai that could impact Jafz’s profitability and cash-generation-capacity. A stabilisation of the rating outlook could be triggered by a resolution of the refinancing of the sukuk well in advance of its maturity. Any negative interference arising from developments within its current shareholding structure — be it through a cash call or an asset sale — would exert negative pressure on the B2 rating.
PREVIOUS RATING ACTION & METHODOLOGY USED
The last rating action on Jafz was implemented on 8 December 2009, when Moody’s downgraded the ratings by three notches to B1 from Ba1 and maintained them on review for further possible downgrade.
The principal methodologies used in this rating were Government-Related Issuers: Methodology Update published in July 2010, and Moody’s Approach for REITs and Other Commercial Property Firms published in July 2010.
Based in Dubai/United Arab Emirates, Jafz is the operator of the Jebel Ali Free Zone, which is adjacent to Dubai’s port and the largest business hub of its kind in the Middle East. More than 6,000 companies, that employ in excess of 120,000 people, operate in the free zone. Jafz’s ultimate parent is Dubai World, which is owned by the government of Dubai. Revenues for the first six months of 2010 amounted to AED 618 million (USD 168 million).
Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody’s Investors Service information.
Moody’s Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.
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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
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