S&P cuts Dubai free zone rating
Dubai, September 27, 2010
Standard & Poor's rating agency has downgraded Dubai's Jebel Ali Free Zone's (Jafza) credit rating on Monday, citing uncertainty over its role in the debt restructuring of its parent company, Dubai World.
State-owned Dubai World this month obtained near-unanimous agreement from its bank creditors to restructure almost $25 billion in debt, which analysts said eased market uncertainty, the S&P said in a statement.
The agency downgraded Jafza's debt rating to B from B+ after placing it under 'negative implications' in November last year.
S&P also cited the 'challenge' arising from the refinancing of Jafza's Dh7.5 billion ($2.04 billion) Islamic bond in November 2012.
The downgrade reflects our view of what we see as DWC's (Dubai World) lack of transparency and uncertain credit profile, DWC's intentions toward Jafza, and the free zone's uncertain stand-alone financial profile after the refinancing of its sukuk in November 2012,' S&P credit analyst Tommy Trask said in a statement.
Asset sales along with bond issues are Dubai's best option to boost revenue because other measures would not generate enough cash on time to plug debt holes, according to analysts.
Prized assets that Dubai could sell include the JAFZ and Dubai World's stakes in the Atlantis Hotel and casino operator MGM Resorts International.
As of June 30, Jafza's total debt adjusted by the ratings agency stood at Dh7.9 billion, and current profitability appears satisfactory on the back of an effective profit rate of about 5 percent on its sukuk, S&P said.
"The sukuk trades at a yield-to-maturity of over 10 percent in the secondary market, however, a rate at which Jafza would likely approximately break even at the net profit level based on current earnings," it added.
The agency said its assessment of the company's stand-alone credit profile mirrored exposure to tough economic and real estate market conditions in Dubai, high capital expenditure levels, and lack of geographic diversity.
The free zone's debt is not guaranteed by the Dubai government, but together with Jebel Ali Port and Dubai's new Al Maktoum International airport it comprises a key trade hub seen as significant to the Dubai economy.
"A further downgrade would likely result from an increase in debt or asset sales at Jafza and up-streaming of cash to DWC," said Trask.
"We could suspend or withdraw the rating if we consider that we don't have sufficient information about Jafza's current and prospective obligations," he added.-TradeArabia News Service