Fitch Rates MAF Sukuk's Updated Programme 'BBB'; Affirms USD400m Certs
MAF Sukuk is a special purpose vehicle (SPV) incorporated in the Cayman Islands solely to act as the issuer of the certificates and the Trustee for the holders of the certificates. The affirmation of the outstanding sukuk of USD400m is due to the update of the sukuk programme not affecting the existing issued certificates, as confirmed by Majid Al Futtaim Holding's (MAF) management.
The certificates' rating is driven solely by MAF's Issuer Default Rating (IDR) and senior unsecured rating of 'BBB'. MAF is the guarantor of certain obligations of Majid Al Futtaim Properties Llc. (MAFP), due to the Sukuk's structure, which includes the following features:
-On the scheduled or any earlier dissolution dates, the outstanding deferred sale price, together with the exercise price payable by MAFP under the purchase undertaking, are intended to fund the final dissolution amount payable by the trustee under the relevant certificate.
-Final dissolution amount should be equal to aggregate face amount of the certificates of the relevant series; together with all accrued and unpaid periodic distribution amounts (if any) relating to the relevant certificates and any other liabilities if any.
On any periodic distribution date, if the returns generated from the Sukuk assets are insufficient to cover the periodic distribution payments due, MAFP undertakes to pay further amounts to the SPV to ensure that there is no shortfall on terms that such funding is repayable from Asset portfolio income revenues, in the future or on the date on which the certificates of the relevant series are redeemed in full.
-MAF has unconditionally and irrevocably guaranteed in favour of the Trustee the due and punctual payment of the guaranteed amounts, which should be equal to the aggregate face amount of the certificates together with all accrued and unpaid periodic distribution amounts (if any) relating to the relevant certificates.
-MAF's and MAFP's obligations under the documentation rank pari passu with MAF's and MAFP's other unsecured obligations;
-The certificates represent an undivided ownership interest solely in the relevant trust assets. Recourse to the trustee in respect of each series is limited to the trust assets of that series and proceeds of such trust assets are the sole source of payments on the relevant certificates. The certificate holders, however, will not have any rights of enforcement as against the trust assets as their rights are limited to enforcement against MAFP of its obligation to purchase the assets pursuant to the terms of the purchase undertaking and to pay the deferred sale price pursuant to the murabaha document, failing which, the certificate holders have the right to enforce the obligations of the guarantor under and in accordance with the guarantee.
MAF undertakes that its obligations under its guarantee will be its direct, unconditional and unsecured obligations and will at all times rank pari passu with its other unsecured obligations from time to time outstanding. Therefore, Fitch assumes that MAF's obligations under its guarantee will rank pari passu with its unsecured obligations.
Certain aspects of the transaction will be governed by English law while others will be governed by DIFC and Dubai/UAE federal law. Fitch notes that they may not be enforceable under applicable laws. Fitch, however, considers the provision of a guarantee by MAF, the undertaking to purchase the assets and to pay the deferred sale price by MAFP and the indemnification provisions in the transaction documents in favor of MAF Sukuk as a strong indication of MAF's and MAFP's intentions to support MAF Sukuk and its obligations. Fitch's rating for the certificates therefore reflects the agency's belief that each of MAF and MAFP would stand behind their respective obligations under the documentation.
By assigning ratings to the programme and certificates issued under it, Fitch does not express an opinion on the programme structure's compliance with Shariah principles or whether the relevant transaction documents are enforceable under any applicable law.
The key rating drivers for Majid Al Futtaim Holding LLC are set out below.
KEY RATING DRIVERS
Continued Strong 2014 Performance
Last year witnessed an 11% year-on-year growth in turnover to AED25Bn, resulting in an improvement in EBITDA to AED3.6bn at the consolidated level. The group's operations generated satisfactory cash of AED3.58bn compared with AED3.2bn in 2013. The strong performance in 2014 was mainly due to the group's prime assets, active asset management and favourable market conditions in the UAE.
Strong Recurring Rental Income
MAFP provides solid profitability growth (from shopping malls and hotels), delivering EBITDA of AED2.4bn to the group's consolidated EBITDA of AED3.6bn; supported by high occupancy rates of 97% and a low tenant default rate. Fitch believes the group's continuous improvements to the flagship assets will continue to provide resilient income. Moreover, the group benefits from a diverse tenant base and a healthy wait list for its flagship shopping malls. The group compares well with its European peers due to its high occupancy rate and fairly extended average lease length of eight years.
Conservative Debt Structure
MAF's overall debt structure mainly constitutes senior unsecured debt (revolvers, bonds & sukuk) issued mostly at the holding level (AED6.3bn out of AED9.1bn total debt) and cross guaranteed by MAFP. Secured debt represented 13% of total debt (down from 46% in 2011) for the purpose of constructing the Mall of Egypt, Fujairah City Centre and Beirut City Centre. Unencumbered assets cover remains well above 2.0x.
Retail Supporting Diversification
MAF Retail LLC, a wholly owned subsidiary of the group, is one of the most active retailers in the market with an exclusive franchise for Carrefour S.A. (BBB+/Stable). In 2014, MAF Retail increased its operations to include Middle East, Africa and East Asia with 128 stores. MAF Retail contributes 82% and 32% of the group's turnover and EBITDA, respectively. Fitch believes the retail segment widens the group's diversification and footprint in the region and has a positive effect on the group as long as rent expenses are not increasing beyond forecasted levels and debt (if any) is kept at low levels.
Moderate Development Risk
Fitch derives comfort from the group's development mechanism where at least 50% of gross leasable area is signed prior to initiating shopping malls construction and 75% of allocated capex is uncommitted. Moreover, the group negotiates project construction contract terms to minimise exit costs.
Limited Geographic Diversification
Geographical and asset concentration is high compared with peers with almost 70% of property assets accounted for by three large shopping malls in Dubai.
One large property has been developed on land gifted to the ultimate sole shareholder of Majid Al Futtaim. This property is held in the shareholder's name for the beneficial interest of MAF. Properties that 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. However, Fitch notes that existing law/rules allow the company to get the titles transferred after payment of applicable fees.
Fitch's key assumptions within the rating case for MAF as per the rating action commentary on 30 June 2015 include:
- Occupancy levels to remain solid in malls and hotels
- Moderate growth in rental income
- Strong performance in major assets of the holding
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Net interest cover sustained above 3.0x and deconsolidated Fitch-adjusted leverage below 40%
- Meaningful geographical diversification and/or reduced asset concentration
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A significant downturn in the markets in which MAF operates and higher-than-expected capex, leading to material falls in net interest cover below 1.5x over a sustained period
The group follows an active treasury management policy which has improved its maturity profile to 5.2 years from an average of 4.7 years in 2013. The group has moderate refinancing risk, mitigated by strong liquidity in the market and strong banking relationships, evidenced by the early refinancing of maturities in 2014.