Moody's Investors Service today (May 9) changed Jebel Ali Free Zone’s (Jafza) outlook to developing from negative for the Corporate Family (CFR) and Probability of Default Rating (PDR).

It also affirmed the B2 CFR and PDR as well as the B2 rating for Jafza's November 2012 certificates issued by Jafza Sukuk Limited.

The change in outlook follows the announcement on May 2 of a consent solicitation inviting the holders of the Dh7.5 billion ($2 billion equivalent) certificates to adopt a resolution (meeting scheduled for May 24) to amend the certificates' conditions allowing for a redemption ahead of the November 2012 maturity and a trust dissolution coordinated with a financing package currently under negotiation.

Ratings rationale

The outlook change signals Moody's view that Jafza has taken positive steps in addressing its November 2012 sukuk maturity that could remove some rating constraints factored into the current B2, especially liquidity risk, if finalised.

The announcement by Jafza was coupled by a statement in its 2011 financials that Jafza's going-concern status also rests on a facility mandate that has been signed with a consortium of banks in order to refinance a significant portion of the maturing sukuk with the company's pursuit to complement this facility with new Islamic trust certificates.

Were Jafza able to successfully refinance its sukuk ahead of maturity and to shift its capital structure to a debt maturity profile of longer term nature, such actions would ease the pressure on the company's liquidity profile that remains sustained by a resilient business model and recurring cash flows.

Jafza's adjusted EBITDA margin in 2011 was around 80 per cent following a strong operational performance after a year when revenues have marginally dropped. However, execution risk remains with regards to the timeliness of the transaction.

Jafza is a government-related issuer as per Moody's definition. Jafza's final B2 rating combines a baseline credit assessment (BCA) of 16 (equivalent to B3 on the global rating scale) and a one notch uplift stemming from Moody's low exceptional support assumption from the government in the event the company were to face financial distress.

Jafza's BCA continues to rely on its inherently strong business model, which in turn rests on a large pool of rental contracts with diversified tenants that exhibit high occupancy levels and, to date, low churn rates.

Moody's believes that Jafza will manage to maintain adjusted EBITDA margins well above 60.0 per cent (79.7 per cent per end of 2011).

The BCA is constrained at the B3 level by the current high leverage, translating into an adjusted debt to EBITDA at 7.0 x (as per December 2011), even though it decreased from 7.8x per December 2010.

Furthermore, the current BCA incorporates the risk linked to the refinancing of the sukuk at higher debt cost, which could impact profitability, cash flow generation and interest coverage.

The developing outlook considers the range of potential outcomes (both in terms of ultimate leverage and cash cost of future indebtedness) as well as the ramifications for the company's certificates holders.

Positive momentum for the B2 CFR could gradually emerge 1) as Jafza executes and concludes the contemplated facility to support financing's completion and 2) if new Islamic certificates placement progresses per the company's plan.

On the other hand, the rating could be downgraded if there is increased risk of a funding shortfall. – TradeArabia News Service