Fitch Ratings has affirmed U.A.E based Majid Al Futtaim Holding LLC’s (MAF) Long-term Issuer Default Rating (IDR) and senior unsecured rating at ‘BBB’, with a Stable Outlook. Fitch has also affirmed MAF’s Short-term IDR at ‘F3′.
MAF Global Securities Limited’s global medium-term note (GMTN) programme and MAF Sukuk Ltd were also affirmed at ‘BBB’. Fitch has also affirmed MAF Global Securities Limited’s hybrid security rating at ‘BB+.
The affirmation reflects MAF’s continued solid financial performance backed by growth momentum in U.A.E and our expectation that the company will maintain solid credit metrics over the next three years. Despite heavy investment plans, Fitch expects MAF’s EBIT (which we calculate from rental-derived EBIT derived from property arm Majid Al Futtaim Properties’ (MAFP)) net interest cover and liquidity to remain strong.
Despite meaningful improvements in debt maturity profile, the proportion of secured debt and liquidity, the company’s ratings are currently constrained by the concentration of 70% of its assets in three large shopping malls in Dubai, and by higher planned – albeit flexible – development spend than similarly rated peers. The key driver of any upgrade would be greater geographical diversification, combined with some moderation of expected development spending.
KEY RATING DRIVERS
MAF maintained solid performance and financial metrics in 2012 and 2013, due to its active asset management and growth momentum in U.A.E. market. Operational performance was resilient, with the occupancy rate in its properties remaining at 98%. MAFP benefits from an average lease length of 6.7 years, which compares well with European peers, a high-quality and diversified tenant base exhibiting an estimated above 90% lease renewal rate, and a low tenant default rate of below 1%.
Strong Interest Cover
Fitch expects MAF’s EBIT (MAFP rental-derived EBIT) net interest cover to remain strong, ranging between 2x-4x over the next three years. Although MAF’s development pipeline remains large, potentially at more than AED22bn over the next five years, such capex is mainly discretionary, and not committed. However, Fitch forecasts capex will be higher than the average of last three years as MAF starts rebuilding its landbank.
Improving Maturity Profile
As of end-May 2014 MAF had over AED9.1bn of liquidity (cash plus available committed lines). The company has improved its maturity profile to an average of 4.7 years currently, from under three years in 2011. Nevertheless, the group still faces moderate refinancing risks, with almost AED1bn maturing/amortising in 2014 and 2015, and then no significant maturities until 2017. A sharper-than-expected economic downturn in the region could put additional pressure on MAF’s liquidity given its new investment plans.
Benefit of MAFP
MAF is rated on a standalone basis, including the benefit of guarantee by MAFP on a majority of MAF’s debt. As part of its analysis of the group, Fitch calculates the ratio of unencumbered assets to unsecured debt and expects this ratio to be maintained well above 2x for an investment-grade rating. However, the main three shopping malls of MAFP are located in Dubai and constitute 70% of its asset portfolio, leading to concentration risk.
Through MAF Retail LLC (MAFR), MAF is also one of the most active retailers in the region, with the exclusive franchise for Carrefour S.A. (BBB/Stable) in the Middle East, covering 19 countries mainly in MENA and central Asia. On 22 May 2013 MAF agreed to buy out Carrefour’s minority interest of 25% in its MAF hypermarkets business. Fitch believes it will have a moderately positive effect on MAF’s business profile by providing further diversification.
Two large properties have been developed on land gifted to the ultimate sole shareholder of MAF, Majid Al Futtaim. These properties are 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. Fitch, however, notes that existing law/rules allow the company to get the titles transferred after payment of applicable fees.
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:
-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
LIQUIDITY & DEBT STRUCTURE
Active treasury management over the past three years has allowed MAF to lengthen the average tenor of debt to 4.7 years from under three years, and to smooth the maturity profile so that no more than 20%-25% of debt falls due in any given year. This was further improved by the issue of a $500m 10-year bond in April 2014.
MAF’s secured debt has also been materially reduced to 7% of total debt as of end-2013 from 46% in 2011.
MAF continues to have access to bank facilities from domestic and international banks. Fitch expects the group to further diversify its funding sources and extend its debt maturity profile.
Bashar Al Natoor