S&P cuts Dubai free zone's credit rating

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By Tamara Walid  www.reuters.com

DUBAI, Sept 27 (Reuters) – Standard & Poor’s downgraded Dubai’s Jebel Ali Free Zone’s (JAFZ) credit rating on Monday, citing uncertainty over its role in the debt restructuring of parent Dubai World.

State-owned Dubai World [DBWLD.UL] this month obtained near-unanimous agreement from its bank creditors to restructure almost $25 billion in debt, which analysts said eased market uncertainty.

The agency downgraded JAFZ’s debt rating to B from B+ after placing it under “negative implications” in November last year. S&P also cited the “challenge” arising from the refinancing of JAFZ’s 7.5 billion UAE dirham ($2.04 billion) Islamic bond in November 2012.

“The downgrade reflects our view of what we see as DWC’s (Dubai World) lack of transparency and uncertain credit profile, DWC’s intentions toward JAFZ, and JAFZ’s uncertain stand-alone financial profile after the refinancing of its sukuk in November 2012,” S&P credit analyst Tommy Trask said in a statement.

Asset sales along with bond issues are Dubai’s best option to boost revenue because other measures would not generate enough cash on time to plug debt holes, analysts say.

Prized assets that Dubai could sell include the JAFZ and Dubai World’s stakes in the Atlantis Hotel and casino operator MGM Resorts International.

As of June 30, 2010, JAFZ’s total debt adjusted by the ratings agency stood at 7.9 billion dirhams, and current profitability appears satisfactory on the back of an effective profit rate of about 5 percent on its sukuk, S&P said.

“The sukuk trades at a yield-to-maturity of over 10 percent in the secondary market, however, a rate at which JAFZ would likely approximately break even at the net profit level based on current earnings,” it added.

The agency said its assessment of the company’s stand-alone credit profile mirrored exposure to tough economic and real estate market conditions in Dubai, high capital expenditure levels, and lack of geographic diversity.

The free zone’s debt is not guaranteed by the Dubai government, but together with Jebel Ali Port and Dubai’s new  Al Maktoum International airport it comprises a key trade hub seen as significant to the Dubai economy.

“A further downgrade would likely result from an increase in debt or asset sales at JAFZ and up-streaming of cash to DWC,” said Trask. “We could suspend or withdraw the rating if we consider that we don’t have sufficient information about JAFZ’s current and prospective obligations.” (Editing by Dinesh Nair and Michael Shields) ($1=3.673 UAE Dirham)

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