Jafz downgraded over DW debt uncertainty

Standard & Poor's Ratings Services on Monday lowered long-term issuer credit rating of Jebel Ali Free Zone (JAFZ) to 'B' from 'B+' and removed it from CreditWatch. The outlook is negative.

The downgrade of JAFZ follows the announcement that an agreement has been reached for the restructuring of a significant share of the debt of Dubai World Corp. (DWC), JAFZ's parent company.

"The downgrade reflects what we see as DWC's lack of transparency and uncertain credit profile, its intentions toward JAFZ, and JAFZ's uncertain stand-alone financial profile after the refinancing of its Dh7.5 billion sukuk in November 2012," said Standard & Poor's credit analyst Tommy Trask.

Jafz's profitability currently appears satisfactory, benefiting from an effective profit rate of about five per cent on its Dh7.5 billion sukuk. The sukuk trades at a yield-to-maturity of over 10 per cent in the secondary market, however, a rate at which Jafz would likely approximately break-even at the net profit level based on current earnings.

On June 30, 2010, Jafz's total debt adjusted by Standard & Poor's was Dh7.9 billion.

“Our assessment of Jafz's stand-alone credit profile reflects our view of its exposure to the tough economic and real estate fundamentals in Dubai, high current capital expenditure levels, and lack of geographic diversity. Mitigating these weaknesses are relatively stable licensing and registration fees as well as lease income generated by land and facilities. We understand Jafz continues to enjoy a relatively high occupancy level across the free zone.”

The negative outlook reflects S&P’s view of the uncertainty over the role that Jafz will play in the servicing and repayment of DWC debt and the consequent challenge Jafz faces in refinancing the 7h.5 billion sukuk in November 2012.

"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.

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