Fitch Ratings-London-04 August 2016: Fitch Ratings has affirmed UAE based Majid Al Futtaim Holding LLC's (MAF) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook is Stable. Fitch has also affirmed MAF's Short-Term IDR at 'F3'.
The ratings on MAF Global Securities Limited's global medium-term note (GMTN) programme and MAF Sukuk Ltd have also been affirmed at 'BBB'. Fitch has affirmed MAF Global Securities Limited's hybrid security rating at 'BB+'. We have also reviewed the sukuk documentation, structure, terms and conditions and there has been no material change in the certificate programme for the sukuk vehicle since the last review. For more details, see the latest sukuk vehicle rating action commentaries on our website.
The affirmations reflect MAF's continued solid financial performance despite challenging market conditions in the UAE. We expect MAF's credit metrics to remain strong over the next three years and in line with our rating guidelines. Fitch expects MAF's recurring EBITDA (rental derived EBITDA from the property arm Majid Al Futtaim Properties or MAFP) interest cover and liquidity to remain strong, despite opportunistic investment plans. Under our rating case, Fitch-expects loan to value (derived from MAFP) to remain below 50% in 2016 and recurring EBITDA (rental derived EBITDA from MAFP) to gross interest expense to comfortably range between 3x and 4x in 2016.
The ratings also reflect MAF's attractive prime shopping centres yielding defensive rental income in Dubai, low vacancy rates, increasing lease spreads in 2015 and overall smooth average lease maturity profile of 5.7 years. Given an average tenant occupancy cost of 10%, Fitch believes MAFP will be able to achieve positive lease spreads in its top five shopping malls in 2016 without affecting occupancy ratios.
KEY RATING DRIVERS
Stable FY15 Performance
Revenues grew by a moderate 8% y-o-y to AED27.3bn in FY15, despite challenging market conditions. This resulted in a 7% increase in EBITDA to AED3.8bn. The improvements were mainly attributable to the group's portfolio of prime assets, active lease management, increased attractiveness of the Dubai market to retail tenants and increased revenues from Majid Al Futaim Retail LLC (MAFR). We forecast fairly stable EBITDA for 2016, given adverse market conditions.
Resilient Income, Diverse Tenant Base
MAFP generated rental-derived EBITDA of AED2.6bn in 2015, an increase of 10% compared with 2014, and contributing 68% of MAF's consolidated EBITDA of AED3.8bn. Growth was backed by active pricing initiatives for the shopping malls, high occupancy rates of 98%, a diverse tenant base and low tenant default rates. Footfall for the 14 consolidated malls increased by 3% during 2015 to 171 million visitors, backed by the expansion of MAF's largest asset Mall of the Emirates, expansion of City Centre Muscat and opening of new City Centre Me'aisem. Moreover, sustainable footfall is supported by the strategic locations of the malls and the adjacent hotels. We believe MAFP continues to maintain a smooth lease profile coupled with active lease management.
Improved Debt Profile, Solid Liquidity
MAF remains committed to diversifying its debt profile with public debt issuance constituting 65% of the group outstanding debt of AED10.5bn as at FY15, reflecting on the group's ability to access capital markets. Secured debt slightly increased over 2015 to 14% of total debt vs. 13% in 2014 as the group draws down on project finance facilities in Egypt. The ratio of unencumbered assets remains above 2x. The debt maturity profile of 5 years remains smooth with no significant maturities until 3Q18. MAF's current debt maturity profile of 5 years at YE2015, provides it with stable financing, slightly below its average lease life of 5.7 years
Retail Supporting Diversification
Fitch believes MAFR will continue to improve MAF's business profile via its increased footprint in the Middle East, Africa and CIS with a portfolio of 153 stores through its franchise for Carrefour S.A. (BBB+/Stable). The exclusive franchise partnership has been renewed until 2025 and extended to include 19 additional countries, to reach 38 countries so far. Fitch also views positively the healthy cash generation at the MAFR level and from the non-recourse nature of the group's debt to MAFR. The contribution of MAFR to revenues and EBITDA in 2015 was 80% and 30%, respectively. We believe this will remain in the same range for the next three years with a continued focus on the UAE market. The retail segment has a positive effect on the group unless debt and lease expenses increase beyond Fitch's expectations.
Moderate Development Risk
In June 2016, the group has announced opportunistic capex plans of AED30bn for UAE until 2026, to develop 10 new shopping malls under the 'city centre' brand, expand 6 existing malls, launch of six new hotels, add 10 new Carrefour hypermarkets and 30 new supermarkets. We view management's flexible spending positively, as well as the managed development risk where at least 50% of gross leasable area is pre-let prior to the construction initiation of the shopping malls, coupled with the low exit costs from work in progress projects. We also note that the announced capex plan for 2018 remains largely uncommitted and that the UAE strategic development plan for 2026 remains discretionary and subject to market conditions. The group's capex plans are not expected to have an impact on MAF's rating as long as Fitch-adjusted credit metrics remain within guidance for the current rating.
Purchase of Gifted Land
During 2015, MAF transferred ownership of two plots of land in Al Barsha (land of the Mall of the Emirates) and Deira (land of Deira City Centre), previously gifted by the Ruler of Dubai to the ultimate sole shareholder of MAF. The ownership deeds of Al Barsha and Deira City Centre land plots were transferred to MAFP, which we believe lessens the impact of asset enforceability under stressed scenarios.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for MAF include:
- Stable occupancy levels for shopping malls despite less favourable market sentiment
- Drop in revenues and earnings in the hospitality segment
- Increased debt issuance for 2016/17 to finance capex and increase interest cost
- Overall stable profitability metrics in line with previous year
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- MAFP recurring income EBITDA interest cover sustained above 3.0x and MAFP derived loan to value 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 MAFP recurring income EBITDA interest cover below 1.5x over a sustained period
LIQUIDITY
Liquidity cover remained strong during 2015. At 1Q16, MAF had AED1.8bn in cash balances (including restricted cash), AED7.3bn in committed undrawn revolvers, sufficient to finance the group's maturing debt until 2017 of AED1.8bn, meet its committed capex and service interest charges.
Contact:
Principal Analyst
Samer Haydar
Associate Director
+971 4 424 1240
© Press Release 2016
