Johannesburg, 17 October 2018 — Global Credit Ratings has today accorded the City of Johannesburg Metropolitan Municipality a long term national scale Issuer rating of AA(ZA), and a short term rating of A1+(ZA). The outlook is accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to City of Johannesburg Metropolitan Municipality (“Johannesburg”, “the metro”) based on the following key criteria:
City of Johannesburg Metropolitan Municipality (“Johannesburg”) is the economic heartland of South Africa, with a diverse economy accounting for around 15% of the country’s GDP. Social indicators are mainly above the national average, and the metro continues to attract migrants from around the country and the African continent. Accordingly, the metro benefits from strong operational support from the National Government, as has been evidenced by the high level of grant funding received.
Johannesburg achieved another unqualified audit in FY17, whilst five municipal entities received clean audits. Although there was a spike in irregular expenditure, management indicated that this was the result of efforts to identify past infringements. Johannesburg has also detailed the actions necessary to address outstanding matters, with the intention being to achieve a clean audit outcome.
Johannesburg has reported fairly robust operating surpluses over the review period, albeit with a general decline in quantum and a review period low was reported in FY17. Combined with persistent working capital absorptions, this has constrained cash flow from operations and necessitated increased recourse to debt and internal cash to maintain capex at the high targeted levels.
Persistently high debtor balances remain a constraint on the metro’s cash flows. While GCR positively notes efforts to strengthen enforcement, past initiatives have only been marginally successful.
Net debt to income increased from 17.5% at FY14 to 33.4% at FY17, well above the level of other South African municipalities. Whilst the metro’s economic strength suggests that current gearing can be comfortably serviced, the high debt does constrain the rating. Positively, Johannesburg has demonstrated strong access to debt facilities from a wide range of sources, including commercial banks, development agencies and the capital market. This has allowed for favourable terms on loans and a very long maturity profile. Moreover, budget projections indicate that gearing will moderate slightly, and remain fairly stable over the medium term.
With cash and investments having declined over the review period, Johannesburg now reports a moderate liquidity profile. Total cash coverage of 61 days at FY17 is in line with GCR’s prudent benchmark, but after adjusting for unspent conditional grants, cash coverage registered at 53 days, whilst excluding sinking fund investments, cash coverage would be just 23 days.
Positive rating movement is dependent on progress in bolstering cash flows through stronger operating surpluses or improved debtor collections that would enhance operating cash flows and provide the necessary funding to support capex. Conversely, GCR considers there to be limited scope for further increases in gross debt, and factors that lead to higher gearing metrics would impact the rating. This may include a further contraction in the operating margin and/or cash flows, as well as a reduction in cash holdings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/ last rating (October 2018)|
|Long term: AA(ZA); Short term: A1+(ZA)|
|Sector Head: Corporate and Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2018
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|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings are 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.
City of Johannesburg Metropolitan 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 ratings have been disclosed to City of Johannesburg Metropolitan Municipality.
The information received from City of Johannesburg Metropolitan Municipality and other reliable third parties to accord the credit ratings included:
- Audited financial results of Johannesburg for 2016/2017 plus four years comparative results;
- The 2017/2018 Integrated Development Plan;
- The 2017/2018 – 2019/2020 medium term budgets;
- The AG report on municipality for 2016/2017;
- Corporate presentations;
- Section 52/schedule C reports for Johannesburg; and
- Statutory documentation for the category A municipalities.
- Industry comparative data;
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR accords City of Johannesburg Metropolitan Municipality a rating of AA(ZA); Outlook Stable