Jebel Ali Free Zone – Playing catch up (PDF)

Our credit view on Jebel Ali Free Zone (JAFZ) – rated A1/Stable and A/Neg by Moody’s and S&P respectively – is based primarily on the company’s strategic importance to the government of Dubai and its central role in the development of the emirate as a regional trade and logistics hub. While JAFZ’s revenue model is strong and the company reported good results for 2008, the high leverage, with debt/EBIDTA in excess of 8x, remains an overhang. We initiate coverage on JAFZ with a stable credit view.

We recommend investors buy the JAFZ ‘12 sukuk (AED) which is currently trading at an offer discount margin of 1,211bps. As a hedge, we recommend the Dubai 5Y CDS. Our target relative spread on the trade is 500bps (currently 711bps) with a stop loss at 850bps. The 16% yield (approx.) on the sukuk is high compared with the other quasi-sovereign entities in the Dubai Inc universe (see Chart 1 below). The sukuk was issued in 2007 at the peak of the dirham revaluation speculation and was the instrument of choice for investors to express a view on the currency. However, once speculation about revaluation abated, the sukuk, which had initially performed very well, began to sell off and never quite recovered, even though bonds issued by its
peers caught a strong bid post the federal assistance provided to Dubai earlier this year. While its high leverage means that JAFZ’s standalone credit quality is clearly weaker than that of its peers DP World and DEWA, its operations are of key significance both to Dubai and to the wider region. At these levels, the sukuk offers an attractive investment opportunity, in our view.