May 23 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Majid Al Futtaim Holding LLC’s (MAF) Long-term Issuer Default Rating (IDR) and senior unsecured rating at ‘BBB’, with a Stable Outlook. Fitch has also affirmed MAF’s Short-term IDR at ‘F3’. MAF Global Securities Limited’s global medium-term note (GMTN) programme and MAF Sukuk Ltd were also affirmed at ‘BBB’. Fitch has also assigned Majid Al Futtaim Holding’s prospective hybrid security an expected rating of ‘BB+(EXP)’.
On 22 May 2013 Majid Al Futtaim Holding LLC and Carrefour SA (‘BBB’/Stable) agreed a buyout of Carrefour’s minority shareholder interest of 25% in its MAF hypermarkets business. Fitch believes it will have a moderately positive effect on MAFH’s business profile. The acquisition will provide further diversification for MAF and enhance its portfolio both from business and geographic standpoint. From a financial perspective, the impact on leverage metrics will be limited as Fitch estimates that the financial ratios will remain stable (after allocating the benefit of MAF’s retail ability to absorb debt (mainly the operating lease related debt) to MAF Holding) as adjusted EBIT net interest coverage (NIC) will be above 1.5x and the loan to value (LTV) is expected to peak at around 50% over the coming four years. Liquidity score is expected to remain above 2x.
The USD subordinated perpetual capital notes (hybrid notes) that are expected to finance the Carrefour minority share purchase are deeply subordinated and qualify for 50% equity credit and will be perpetual capital notes. The notes will be issued on a subordinated basis by MAF Global Securities Limited are constituted by a trust deed, made between the issuer, Majid Al Futtaim Holding LLC , Majid Al Futtaim Properties LLC (together with MAF, the guarantors and each a guarantor). The assignment of the final rating remains contingent upon the receipt of final documents conforming to information already received.
The hybrid notes rank pari passu among themselves; and they will also be junior to MAF’s junior securities. There is no look-back provision in the notes’ documentation, which gives the issuer full discretion to defer on-going coupon payments on the notes. These features are reflected in the ‘BB+EXP’ rating, which is two notches down from MAF’s ‘BBB’ Long-term IDR reflecting the notes’ increased loss severity and heightened risk of non-performance relative to the senior obligations. This approach is in accordance with Fitch’s criteria, “Treatment and Notching of Hybrid in Nonfinancial Corporate and REIT Credit Analysis” dated 13 December 2012 at www.fitchratings.com.
The notes will have a fixed coupon, and the notes will reset for the relevant swap rate after the initial non call period. The non-call period is expected to be a minimum of five years from the issue date.
Resilient Performance: MAF maintained solid performance and financial metrics in 2011 and 2012, due to its active asset management. Operational performance was resilient, with the occupancy rate remaining at 98%. MAFP benefits from an average lease length of 8.1 years, which compares well with European peers, a high-quality and diversified tenant base exhibiting an estimated above 95% lease renewal rate, and a low tenant default rate of below 1%.
Strong Interest Cover: Fitch expects MAF’s EBIT (MAFP rental-derived EBIT and dividends received from MAFR) net interest cover to remain strong, at about 3x in 2012. Although MAF’s development pipeline remains large, with potential development exposure of more than AED21bn in the coming five years, the capex is mainly discretionary, not committed, and the maximum exit cost for committed capex at any particular year would be in the range of AED500m. Improving Maturity Profile: As of December 2012 MAF had over AED7.4bn of liquidity (cash plus available committed lines), of which AED5.8bn is at the level of MAFH and MAFP. Over 2011 and 2012 MAF improved its maturity profile to an average of four and a half years. Nevertheless, the group still faces moderate refinancing risks over the next few years, with almost AED1.9bn maturing/amortising in 2013 and 2014 and the upcoming maturity of the 2014 undrawn revolving facility totaling AED2.5bn.
Benefit of MAFP: MAF is rated on a standalone basis, including the benefit of MAFP, which guarantees the majority of MAF’s debt. As part of its analysis of the group, Fitch calculates the ratio of unencumbered assets to unsecured debt and expects this ratio to be maintained well above 2x for an investment-grade rating.
Significant Retailer: Through MAF Retail LLC (MAFR), MAF is also one of the most active retailers in the region, with the exclusive franchise for Carrefour S.A. in the Middle East, covering 19 countries mainly in MENA and central Asia. Gifted Land: Two large properties have been developed on land gifted to the ultimate sole shareholder of MAF, Majid Al Futtaim. These properties are held in the shareholder’s name for the beneficial interest of MAF. Properties which are built on land gifted by the ruler of Dubai cannot currently be sold or finance leased, separately, without the prior consent of the ruler. This limitation has an impact on the enforceability of these assets under a stress scenario. Fitch also notes that existing law/rules allow the company to get the tittle transferred after payment of the applicable fee.
Market Downturn: Downgrade pressure would occur if there was a significant downturn in the markets in which MAF operates, leading to material falls in rental income and interest cover falling below 1.5x over a sustained period. A liquidity shortfall in, and/or a material reduction in dividends from MAFR would also be considered negative rating factors.
Debt-funded acquisitions: A lack of a clear commitment to maintain a more conservative financial profile would be considered negative rating factors. Improved NIC, Lower Leverage: Upward rating pressure would arise if NIC were sustained above 3.0x, and deconsolidated Fitch-adjusted leverage below 40%.
In FYE2012 net debt levels were down to AED7bn (AED7.5bn in FYE2011), mainly due to better than expected operational performance. MAF Holding strengthened its liquidity by proactively refinancing USD1.5bn of maturities of 2012 and in 2011. This allowed MAF to lengthen the average tenor of debt to 4.5 years from three at YE2012, and smooth the maturity profile such that not more than 20%-25% of debt falls due in any year. Nevertheless, the group still faces moderate refinancing risks over the next few years, with almost AED1.9bn maturing/amortizing in 2013 and 2014 and the upcoming maturity of the 2014 undrawn revolving facility totalling AED2.5bn.
Also, MAF holdings secured debt have been reduced significantly, bringing secured debt down to 7% of total debt as of 2012 (46% in 2011). Fitch also notes that MAF continues to have access to bank facilities, from domestic and international banks. MAF is expected to further diversify its funding sources and extend its debt maturity profile