Jafz rating upgraded on improved performance

Fitch Ratings on Tuesday upgraded UAE-based property group Jebel Ali Free Zone’s (Jafz) rating on improved liquidity and better-than-expected operating performance.

The global ratings agency said it upgraded Dubai-based free zone’s Long-term Issuer Default Rating to “BB-” from “B+” with stable outlook.

“The upgrade reflects Jafz’s improved liquidity profile and leverage metrics, on the back of stronger-than-expected operating performance and reduced leverage metrics. This was supported by the disposal of EZW Gazeley, by the prepayment of debt, and by a reduction of the interest payable on its term loan. Fitch believes that Jafz’s credit metrics will continue improving in the next two years, supported by stable operating performance and the improved liquidity position.”

Improved Leverage Metrics

Jafz’s total adjusted debt/EBITDAR has improved to 3.8x in 2013 financial year from 6x in the previous financial year, driven by stronger-than-expected operating performance and the Gazeley disposal.

Following successful renegotiation with its banks, aided by reduced leverage, interest payable for Jafz’s term loan was reduced to 3 per cent from 4.25 per cent, which led to reduced financing costs, also improving net interest cover (NIC).

Fitch forecast continued improvement in Jafz’s leverage metrics in the next two years. However, significant deviations from Fitch base case caused by worse-than-expected economic conditions, lower occupancy rates and rental revenues could lead to a negative rating action.

Improved operating performance

Jaz’s revenue was Dh1.53bn in 2013, up 7 per cent yoy. EBITDA margin was well above historical averages; 80.6 per cent at FYE13 compared with 76.8 per cent in 2012 financial year.

The improvement was backed by improved economic sentiment in the Dubai market and increased occupancy rates. Jafz has historically maintained stable rental revenues and EBITDA margins at around 75 per cent, backed by a fairly stable business model. Fitch expects profitability and revenue growth to normalise at historical averages as the economy starts cooling down.

Gazeley sale

In June 2013, Brookfield Asset Management announced acquisition of EZW Gazeley LTD from Economic Zones World (EZW), part of Dubai World. Under the provisions of Jafz’s Dh4.4bn ($1.2bn) Islamic facility, a guarantee was provided by EZW and linked to the completion of a full or partial disposal of Gazeley, which led to a mandatory prepayment of the Islamic facility but limited to greater of $300m or two thirds of net cash proceeds.

Ninety per cent of the prepayment was made in June 2013 while the remaining 10 per cent was paid in September 2013.The sale has had a positive impact on Jafz’s capital structure, liquidity and debt serviceability.

Increased capex and liquidity

Jafz’s liquidity profile improved significantly in the past years on the back of higher profitability, proceeds from the Gazeley sale, reduced financing costs, and restricted capex. Fitch expects modest increases in capex in the medium term, as JAFZ builds additional warehouses and office spaces in anticipation of strong demand. We forecast that the new investments will be financed by internally generated funds and that Jafz will maintain a liquidity score (available liquidity/total short term uses) above 1.5x in the medium term.

Significant contribution to economy

Jafz’s activities are important to Dubai's economy - the companies based in the free zone account for approximately 20 per cent of GDP, and represent a key driver of the development of trade and transport. However, all of JAFZ's operations are based in Dubai, leading to high concentration risk.

Stable performance

Jafz’s main source of revenues comes from recurring leasing and rental revenue – 85.3 per cent in 2013 financial year. Rentals and revenues from the administration of real estate have held up fairly well in the past three years, despite Dubai's challenging real estate market conditions - and have outperformed our rating case. In 2013 rentals and occupancy rates continued increasing on the back of an improving economic environment. Almost 80 per cent of leasable land, 94 per cent of warehouses, 92 per cent of offices and 87 per cent of onsite residential accommodation were occupied as of 31 December 2013. It should be noted that other than land, which has on average a remaining life of six years, most of the lease contracts are renewed annually.

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