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.
Post-refinancing, assuming it will result in a capital structure as detailed in the offering memorandum and bank refinancing, Fitch is likely to upgrade JAFZ's IDR by up to one notch (to 'B+'/Stable). At that time, the Sukuk proposed to be issued by JAFZ SUKUK (2019) Limited would exist, and it is likely that Fitch would then assign it a rating at the same level as the upgraded IDR.
"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. " says Bashar Al Natoor , Director in Fitch's EMEA Corporates team in Dubai.
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.
Although Fitch acknowledges that 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, itself dependent on the health of the regional and global economies as well as the sustained regional political stability. Moreover, Fitch is concerned by the large and increasing supply of rental properties in the free zone sector.
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.
JAFZ SUKUK (2019) Limited was incorporated in the Dubai International Financial Centre (DIFC) to act as the issuer of the certificates and the trustee for the holders of the certificates.
The Certificates' rating is driven solely by JAFZ's IDR of 'B' due to the Sukuk's structure, which Fitch understands includes the following features: 1) the pari passu ranking of JAFZ's obligations under the Sukuk documentation with JAFZ's other secured obligations; 2) JAFZ's undertaking to purchase from the trustee all of its right, title, interests, benefits and entitlements in to and under the Wakala assets on the scheduled or any earlier dissolution dates; 3) on any periodic distribution date, if the returns generated from the Sukuk assets are insufficient to cover the periodic distribution payments due, JAFZ's undertaking to pay further amounts to remedy such shortfall as servicing agent; and 4) the Sukuk will be secured by a receivables assignment agreement and a mortgage over JAFZ's usufruct rights.
Fitch understands that JAFZ has confirmed that its obligations under its undertaking to purchase will be its direct, unconditional and secured obligations and will at all times rank pari passu with its other secured obligations from time to time outstanding. Therefore, Fitch assumes that JAFZ's obligations under its undertaking to purchase will rank pari passu with its secured obligations.
While the Certificates, the Service Agency Agreement, the Purchase Undertaking, the Sale Undertaking, the Declaration of Trust, the Allocation Deed and the Agency Agreement will be governed by English law, Fitch notes that they may not be enforceable under applicable law, including, without limitation, Dubai law or UAE federal law. Fitch, however, considers the provision of the Purchase Undertaking by JAFZ as a strong indication of JAFZ's intention to support JAFZ's Sukuk and its obligations. Fitch's rating for the Certificates therefore reflects the agency's belief that JAFZ would stand behind its obligations under the Sukuk documentation.
By assigning an expected rating to JAFZ's Sukuk, Fitch does not express an opinion on the structure's compliance with Shari'a principles or whether the relevant transaction documents and securities are enforceable under any applicable law, including, without limitation, Dubai law or UAE federal law.
Fitch has conducted a Rating Assessment Service for JAFZ.
