OREANDA-NEWS. Fitch Ratings has upgraded Jebel Ali Free Zone FZE's (JAFZ) Long-term Issuer Default Rating (IDR) to 'BBB-' from 'BB-'. The Outlook is Stable. Fitch has also upgraded JAFZ Sukuk (2019) Limited's senior secured rating to 'BBB-' from 'BB-'. The ratings have been removed from Rating Watch Positive (RWP).

The upgrade and alignment of JAFZ's rating with its parent, DP World (BBB-/Stable/F3), reflects Fitch's assessment of strong links between JAFZ and its new owner under its parent and subsidiary rating methodology. Fitch expects the acquisition of JAFZ by DP World to be positive for the group's operating efficiency at the Port of Jebel Ali in Dubai. DP World's ownership of JAFZ will enable the group to improve the layout of the port access, allow it to expand its logistic capacity and access to support the ongoing growth of Jebel Ali port and improve integration of the port area with the new Al Maktoum International Airport.

Any downgrade or revision of the Outlook to Negative for DP World would result in Fitch reassessing the current alignment of the parent and subsidiary ratings.

KEY RATING DRIVERS
Strong Links With Parent
Under Fitch's parent and subsidiary rating linkage methodology, we assess JAFZ as having strong legal, operational and strategic links with DP World following its recent acquisition. The assessment includes presence of cross-default clauses, centralised treasury, common management and jurisdictions and strategic importance. The strong parent company ties form JAFZ's primary rating driver.

Significance to the Economy
JAFZ remains a key part of Dubai's economy with the company and the activities based in the Free Zone accounting for 20% of Dubai's GDP. JAFZ is also of strategic importance both geographically, providing the link from the Jebel Ali port to Al Maktoum International Airport, and operationally, with full foreign ownership, tax exemptions and a customs free area. The area is also situated alongside the site for the 2020 Expo, which is likely to generate benefits for both JAFZ and its parent company when preparations and development get underway.

Solid FY14 Operational Performance
JAFZ delivered solid results for FY14 with revenue increasing 10% to AED1,688m (FY13: AED1,531m) driven by improved occupancy rates and increased fee income. The company maintained stable EBITDA margins generating AED1,362m for FY14 (FY13: AED1,234m). While the company has provided good revenue growth and management's attention to cost control has maintained margins, Fitch's expectations are for more moderate growth levels and profitability margins to decline to historical levels in FY15 and then be maintained over the forecast period.

Limited Geographic Diversification
While JAFZ forms an important of the Dubai economy, the fact that all operations are based in Dubai represents a high concentration risk. JAFZ's business tends to be less volatile than the broader Dubai office market. However, the company's performance is correlated with the general level of activity in Dubai as well as the economic strength and political stability of regional GCC members in particular. Fitch also notes the continuing development and available supply of rental properties in free zones throughout Dubai.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- Positive rating action on DP World would likely result in positive rating action on JAFZ, providing that the strength of the parent-subsidiary linkage does not weaken.

Negative: Future developments that could lead to negative rating action include:
- A decline in support from the parent or negative rating action on DP World would likely result in negative rating action on JAFZ.

KEY ASSUMPTIONS
- Continuing strong links with the parent
- Revenue growth in mid to high single digit range for the forecast period; driven by steadily increasing lease volumes with occupancy and rental rates impacted by new volumes availability
- Relatively stable EBITDA margins
- Increased forecast capex intensity expectations.