Fitch upgrades Jafz to ‘B+’

Successful completion of sukuk was key factor in rating upgrade

Fitch Ratings has upgraded Jebel Ali Free Zone FZE's (Jafz) Long-term Issuer Default Rating (IDR) to 'B+' from 'B' and removed it from Rating Watch Positive (RWP).

Global ratings agency said outlook of Jafz is stable.

The upgrade reflects the successful completion of the Sukuk offering and bank refinancing, which addresses the refinancing maturity of a Sukuk due in November 2012. Fitch noted that the final terms in the final documentation conformed materially to information already received.

"The rating reflects the fact that Jafz-based company activities are one of the significant contributors to Dubai's economy, currently accounting for approximately 21.1 per cent of Dubai's GDP, and the fact that they represent a key driver for the development of the trade and transport industries in Dubai," said Bashar Al Natoor, Director in Fitch's EMEA Corporates team in Dubai. "Jafz maintains a diverse portfolio of land tenants in terms of industry sector and geographic base segments. Its top 10 customers represented around 10.4 per cent of total leasing revenue and the top customer represented less than 3.0 per cent of the leasing revenue as of 31 December 2011. However all of Jafz's operations are based in Dubai which entails a high concentration risk," Al Natoor added.

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 per cent of leasable land, 90 per cent of warehouses, 78 per cent of offices and 88 per cent of onsite residential accommodation (OSR) were occupied as of 31 December 2011.

Jafz's rentals are driven by land rent, which constitutes almost 40 per cent of its total leasing income and had a lease term of about seven and a half years on average and a high renewal rate, with 80 per cent of companies established in the free zone at 1 January 2007 still operating there. However, the other 60 per cent of rents are 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, which is 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 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.

Fitch notes Jafz's improving debt maturity profile under the proposed refinancing. Nevertheless, based on Fitch's 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 amortisation schedule of the loan facility.

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