Moody’s downgrades Jebel Ali Free Zone on ties to Dubai World

Moody's Investors Service has downgraded the foreign and local currency issuer ratings of Jebel Ali Free Zone FZE ("Jafz") in Dubai and the rating for Jafz Sukuk Limited AED 7.5 bln (USD 2.04 bln) Trust Certificates due in 2012 to A2 from A1 and placed the ratings under review for further possible downgrade.
The downgrade was prompted by the close commercial relationship between Jafz and Dubai World, its ultimate parent, which has impacted Jafz's baseline credit assessment given the growing financial challenges at Dubai World. In particular, Jafz shares its treasury services with DW. Jafz holds its surplus funds at DW level under shared treasury services and can call these funds on demand. The total inter-company receivables per 2008 year-end amounted to AED 2.1 bln (USD 571 mln), of which AED 1.7 bln relate to DW.
Contrary to assumptions made at the time of the rating assignment and given the interdependency of both entities, Moody's concluded that Jafz is not sufficiently ring-fenced and thus is more aligned to DW, which plays an important role in managing Jafz's own funds.
DW's credit profile is likely to have weakened given its significant property exposure to the Dubai market through its subsidiary Nakheel as well as upcoming refinancing of Nakheel's USD 3.5 bln sukuk, which matures in December 2009 and which is guaranteed by DW. Consequently, Moody's has downgraded the Baseline Credit Assessment (BCA) of Jafz by one notch to reflect the interdependency of both entities in view of the weakened parent company.
Ratings have been placed under review for possible further downgrade as Moody's seeks to assess the underlying operating performance in the first half of 2009, future prospects and expectations in light of weak global macroeconomic conditions impacting the Dubai economy. The review will also focus on the relationship with DW and is expected to be concluded by the end of July.
The BCA of 11 is underpinned by recurring rental income, a solid track record of consistently high EBITDA margins and low customer concentration.
Ratings also take into account the flexibility management has to scale down non-discretionary capital expenditures. Accordingly, Moody's expects the company to be around free cash flow break-even levels in 2009 and 2010 as a reflection of its downscaled expansionary path. However, the BCA also reflects the high exposure to a single economy, high financial leverage and weak back-stop liquidity.