Johannesburg, 25 Sep 2013 — Global Credit Ratings has today assigned Nkangala District Municipality initial national scale issuer ratings of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has assigned an initial international scale rating of BBB- to Nkangala District Municipality; with the outlook accorded as Stable.
Global Credit Ratings has accorded the above credit rating(s) on Nkangala District Municipality based on the following key criteria:
NDM has a relatively wide mandate in terms of supporting the underlying municipalities. Primarily this involves rolling out water, sewerage and roads infrastructure, but also includes providing services and administrative support, particularly to the lower capacity municipalities. Income is derived almost entirely through grant funding from the provincial and national government, which is then utilised to meet its operational and capex requirements. As grant receipts have been committed by government, this provides strong certainty of revenue, albeit declining tax receipts at national level may impact funding over the medium term. As NMD does not provide any trading services, its debtors book has been negligible over the review period, relieving it of one of the most problematic areas for many municipalities in South Africa.
Given its limited functions and strong fiscal support, NDM has reported very healthy surpluses and operating cash flows. Gross interest coverage has thus been very comfortable, whilst sizeable operating surpluses have been registered. NDM’s investment portfolio amounted to R485m at FYE13 (FYE12: R486m), primarily comprised of short term deposits spread amongst the large domestic banks and financial institutions. This translated into almost 1.5 years’ worth of cash on hand in both periods. NDM has a small portion of debt, arising from historical transactions. Nevertheless, the district has reported a strong net cash position over the review period, with even gross gearing low at 15.5% at FYE12. There are no plans to raise further debt funding.
Plans to substantially increase spending to address the infrastructure backlog would see the investment portfolio reduce, but notwithstanding forecast, this will likely only be over the medium term as capex has generally been just half of budget.
The rating is at GCR’s ceiling for district municipalities, so an upgrade is unlikely under the current municipal structure. Nevertheless, the longer term ability to spur economic growth throughout NDM’s municipalities, without significantly prejudicing solvency measures, would likely result in upwards rating pressure. Conversely, a curtailment in grant funding would be negatively considered, given NDM’s reliance on government. This would likely lead to a substantial erosion of the cash reserves, and deterioration of credit protection metrics.
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GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Nkangala District Municipality participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Nkangala District Municipality with no contestation of the rating.
The information received from Nkangala District Municipality and other reliable third parties to accord the credit rating included the latest audited annual financial statements (plus four years of comparative numbers), budget reports, the Integrated Development Plan, most recent year to date accounts and other publicly available documentation as required by the Municipal Finance Management Act No. 56 of 2003.