Fitch Affirms Hamriyah Free Zone Authority at 'BBB+'; outlook stable

The ratings reflect a relatively strong relationship between HFZA and the Emirate of Sharjah (Sharjah), using Fitch's parent and subsidiary rating linkage methodology. As such, the rating of HFZA is linked but not aligned to Fitch's assessment of Sharjah's sovereign credit quality.

The ratings primarily reflect HFZA's close links to Sharjah, including Sharjah's direct 100% ownership of HFZA and representation in HFZA's management, the provision of free land by Sharjah and the moderate strategic importance of the free zone to Sharjah's economy. Therefore, Fitch believes that Sharjah would directly or indirectly support HFZA, in case of need. This is a key component of the ratings.

On a standalone basis, the financial profile of the HFZA would likely warrant a lower rating than the one assigned. Nevertheless, the ratings are supported by HFZA's reasonably strong standalone credit profile, reflecting moderate forecast leverage and stable income base. The latter is based on the relatively mature rental portfolio, coupled with long lease terms, low vacancy rates and low speculative development.

HFZA's FYE08 financial position (based on 2008 unedited financial) was in line with Fitch's expectations, with adjusted net leverage of 0.1x and the funds from operations (FFO) fixed-charge cover at 93.6x. The company reported negative free cash flow (FCF) in 2008 due to heavy capex, which Fitch expects to continue at least through 2009 and to be funded with additional borrowings. Total debt/EBITDA peaked at 14.2x in 2002, and HFZA was able to de-leverage in 2007. However, projected financials illustrate a more leveraged profile as net debt/EBITDA is projected to increase and peak in 2010 at approximately 2x.

The ratings are limited by HFZA's exposure to cyclical end-markets particularly in the current challenging market conditions, a lack of high-quality, blue-chip tenants when compared to other international peers, and below-average corporate governance given the lack of an independent Board of Directors and the absence of formal risk-control policies.

In addition, there are infrastructure constraints (electricity, water and gas), which may limit HFZA's ability to cope with the expected expansion of current and new businesses, exposure to moderate construction risk relating to new infrastructure developments and a competitive environment i.e. competition from other free zones in the UAE.