Fitch Ratings has upgraded Jebel Ali Free Zone FZE’s (JAFZ) Long-Term Issuer Default Rating (IDR) to ‘BBB’ from ‘BBB-‘ with a Stable Outlook. Fitch has also upgraded JAFZ Sukuk (2019) Limited’s senior unsecured rating to ‘BBB’ from ‘BBB-‘.
The upgrade and alignment of JAFZ’s rating is driven by the upgrade of its parent DP World (BBB/Stable/F2), reflecting Fitch’s assessment of continuing strong links between JAFZ and its owner under its parent and subsidiary rating methodology.
Fitch has also re-assigned its senior secured rating on JAFZ Sukuk (2019) Limited to a senior unsecured rating, reflecting the release of the Sukuk security as necessary conditions under the Sukuk documentation were met. The approach to rating the Sukuk has not changed.
Strong Links With Parent
The strong parent company ties are the primary rating driver for JAFZ and accordingly the ratings are aligned. Under Fitch’s parent and subsidiary rating linkage methodology, we assess JAFZ as having strong legal, operational and strategic links with its parent following its acquisition in 2015. The strong links reflect the presence of cross-default clauses, centralised treasury, common management and jurisdictions and strategic importance.
Significance To The Economy
JAFZ remains a key part of Dubai’s economy. The company and its activities based in the Free Zone area account for around 20% of Dubai’s GDP. JAFZ is also of strategic importance geographically, providing the link from the Jebel Ali port to Al Maktoum International Airport, and operationally, with full foreign ownership, tax exemptions and a customs-free area. The area is also situated alongside the site for the 2020 Expo, which is likely to generate benefits for both JAFZ and its parent company when preparations and development get underway.
Healthy FY15 Operational Performance
JAFZ delivered good results for FY15 with revenue increasing 7% yoy to Dh1,812m (FY14:Dh1,688m) driven by improved occupancy rates, increased annual rental prices, and around 30% leasing of the new office tower of Jafza One. The company generated EBITDA for FY15 of Dh1,449m, yoy growth of 6%, equivalent to an EBITDA margin of 80% (FY14: 81%). The company has provided good revenue growth and management’s attention to cost control has maintained margins. Fitch expects high single-digit percentage revenue growth (benefiting largely from Jafza One lettings) over the short term and for profitability margins to remain relatively stable over the forecast period.
Improved Financial Risk Profile
Following the repayment of JAFZ’s bank borrowings (Islamic facility), the group’s leverage and coverage metrics have significantly improved. We expect them to remain strong over the rating horizon. The improvement in the capital structure together with the expectation of solid revenue growth and stable profitability margins indicates a strengthened standalone profile for JAFZ. However, the standalone profile for JAFZ remains constrained by its property ownership structure, whereby JAFZ was granted a usufruct right and concession by the Jebel Ali Free Zone Authority. This differs to other property investment companies which own their real estate and are able to utilise these assets in reducing leverage if required.
Limited Geographic Diversification
JAFZ forms an important part of the Dubai economy, but the fact that all of its operations are based in Dubai represents a high concentration risk. JAFZ’s business tends to be less volatile than the broader Dubai office market. However, the company’s performance is correlated with the general level of activity in Dubai, as well as the economic strength and political stability of regional GCC members in particular. Fitch also notes the continuing development and available supply of rental properties in free zones throughout Dubai.
Change in Sukuk Ranking
Fitch re-assigned the senior secured rating for the Sukuk instruments to a senior unsecured rating as the “Release of Security” conditions set out within the Sukuk prospectus documentation have been met. The documentation required the discharge of the Islamic Facility (repaid by the group in December 2015) and the certificates achieving investment grade status. Subsequently the security for the Sukuk was released and the Sukuk is now unsecured.