Moody's Investors Service has affirmed the Baa3 long-term issuer rating of DP World as well as the Ba1 corporate family and Ba1-PD probability of default rating of Jebel Ali Free Zone (Jafza) with outlook on all ratings remaining stable.

Moody's actions follow DP World's announcement on November 13 that it plans to acquire its sister company, Economic Zones World FZE (EZW), for $2.6 billion. EZW's most noteworthy asset is Jafza, the operator of an offshore business and logistics hub connected to DP World's flagship Jebel Ali Port, which contributes 97 per cent of EZW's total revenue and operating profit. Should the transaction be approved by independent shareholders in December, DP World is expected to complete the acquisition in Q2 2015.

"Our affirmation of DP World's rating reflects our view that the company's credit metrics will remain within our existing rating guidance post-acquisition," said Rehan Akbar, a Moody's analyst and local market analyst for the issuer. "On the other hand, Jafza's affirmation reflects our expectation that the company's existing credit worthiness will remain intact.’

RATINGS RATIONALE

Today's action on DP World reflects Moody's view that its current Baa3 stable rating is already positioned to accommodate the company's growth plans. While the EZW acquisition diverges from its strategy of expanding its ports business, DP World and Jafza will benefit from possible synergies given the strong linkage between the port and free zone.

Jafza in particular could stand to benefit from this transaction should DP World leverage its global expertise and financial flexibility to support growth in the free zone as well as make infrastructure investments and logistic upgrades. However, the acquisition will increase DP World's exposure to Dubai, and economic volatility in the Emirate is likely to have a greater impact on the combined group's financial performance.

In Moody's view, the transaction will limit DP World's ability to make material acquisitions over the next several years, if it plans to maintain its credit metrics within the level commensurate with its Baa3 rating.

DP World currently has strong liquidity with available cash balances of about $3.5 billion, annual operating cash flow generation in excess of $1.2 billion as well as access to a $3.0 billion term and revolving facility. The acquisition will be funded through existing cash sources and existing credit facilities.

However, Moody's notes that DP World has material on-going capital expenditure needs (capex guidance of $1.0 billion in 2014 and approximately $1.5 billion in 2015) and also has a $1.5 billion sukuk maturing in 2017, which could weigh on its liquidity profile in the future.

The affirmation of Jafza's ratings assumes that the company's current capital structure is not negatively affected post-acquisition. DP World has communicated that the existing $650 million trust certificates issued by Jafza Sukuk (2019) Limited and Jafza's syndicated Islamic facility will remain in place.

Should there be increased operational and financial integration between Jafza and DP World, Moody's anticipates that over time ratings of both entities could converge towards that of DP World. – TradeArabia News Service