TEXT-S&P summary: Jebel Ali Free Zone (FZE)

Tue May 29, 2012 6:58am EDT

Mitigating these weaknesses are relatively stable rental, licensing, and registration fees from a diversified tenant base. We understand that JAFZ continues to enjoy a relatively high occupancy level across the free zone. JAFZ is the leading regional industrial free zone operator, strategically located between the Jebel Ali Port and the new Al Maktoum International Airport. JAFZ, together with Jebel Ali Port and Al Maktoum International Airport, forms an integrated trade hub of significant importance to the Dubai economy, and is in our view one of the most strategic assets within DWC.

The company reported Standard & Poor's adjusted funds from operations (FFO) of AED644 million in 2011, before capital expenditure of AED289 million. On Dec. 31, 2011, JAFZ's total Standard & Poor's adjusted debt was AED7.5 billion and the FFO-to-debt ratio stood at 8.8%.

S&P base-case operating scenario

In our base case assumption we assume broadly unchanged revenue and EBITDA margin in 2012 over 2011. We see additional capacity being offset by somewhat lower average rental rates. However we believe good growth in port throughput in 2012 and significant additional capacity of Jebel Ali Port (bringing total container capacity to 19MTU {million twenty-foot equivalent units} by 2014 from a current 14MTU will help to underpin occupancy rates over the next three years.

S&P base-case cash flow and capital-structure scenario

The pending refinancing of JAFZ's AED7.5 billion sukuk due in November 2012 is likely to result in a significantly altered capital structure for the company, with bank debt likely to play a larger role. Regardless of structure, we anticipate a significantly higher cost of funding going forward. That said, we also anticipate that capital expenditure will decline, which means greater cash flow available for debt service. In our base case we assume some weakening in credit metrics from 2013 onwards, but for EBITDA interest cover to remain comfortably above 1.5x.

Liquidity

We classify JAFZ's liquidity position as "less than adequate" under our criteria because of large refinancing needs within the coming 12 months. We do however factor an element of government support into our liquidity assessment. We estimate a ratio of liquidity sources over uses for the coming 12 months of 0.2x.

We assume JAFZ's principal sources of cash for the coming 12 months will be:

-- Cash and cash equivalents of AED1.1 billion, as of Dec. 31, 2011;

-- Limited free operating cash flow after capital expenditures for the 2012 financial year.

The principal use of these sources for the coming 12 months will be:

-- AED7.5 billion sukuk due November 2012.

JAFZ has launched a consent solicitation for prepayment of the AED7.5 billion sukuk and a mandate letter has been signed with a group of banks for its partial refinancing. Additional financing is to be raised through a new sukuk. While we understand that this refinancing process is underway, we believe there remain some execution risks. We believe the restructuring of DWC holding company debt, which we understand matures in 2016 and 2019, has reduced the risk of negative interference in the short to medium term. Asset sales as a source of cash are complicated by the fact that JAFZ owns the facilities but not the land on which they are built. JAFZ has a long-term usufruct right (that is, the right to enjoy profit from developing the land) from the Emirate of Dubai.

Recovery analysis

Standard & Poor's assigned its 'B' senior unsecured debt ratings to AED7.5 billion in sukuk al-musharaka trust certificates, issued by special-purpose vehicle JAFZ Sukuk Ltd. We equalized the debt rating with the long-term corporate credit rating to reflect the lack of contractually senior liabilities and the structural subordination of the issues, given that JAFZ is the actual operating company and has no operating subsidiaries. We expect JAFZ's future borrowings to be unsecured as long as the sukuk remains outstanding.

Although sukuk investors have no direct claim on JAFZ's assets or its contributions to the musharaka trust, they benefit from an implicit guarantee, under which JAFZ will cover any shortfalls in payments due to them. Under Standard & Poor's sukuk rating methodology, the sukuk qualifies for full credit enhancement, which entails equalizing the debt rating with the corporate credit rating on JAFZ. Because the musharaka trust, and ultimately the sukuk noteholders, have no senior claim on the cash flow generated by the land assets dedicated to the trust, the sukuk issue ranks equally with other senior unsecured debt issued by JAFZ.

Outlook

The negative outlook reflects our view of risk related to the refinancing of the AED7.5 billion sukuk in November 2012.

The rating could be lowered in the event of an increase in debt or asset sales at JAFZ and up-streaming of cash to DWC. We are likely to revise the outlook to stable if the company is successful in refinancing the sukuk due in November 2012.

The lack of information about DWC continues to compromise our analysis of JAFZ and constrains the rating at the given level. We could suspend or withdraw the rating if we consider that the risk from negative interference or low information quality becomes too great.

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