Johannesburg, 18 Oct 2017 – Global Credit Ratings has today accorded Nkangala District Municipality national scale issuer ratings of A(ZA) and A1(ZA) in the long term and short term respectively. The ratings have been accorded a Stable outlook. Furthermore, Global Credit Ratings has accorded Nkangala District Municipality an international scale issuer rating of BB-, with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings Nkangala District Municipality (“NDM” or “the District”) based on the following key criteria:
NDM’s mandate is to coordinate infrastructure development across the six municipalities in its district, as well as supporting the underlying municipalities in a range of functions. This includes overseeing sewage, water and road infrastructure needs and the implementation of projects that address the disparities. Support functions comprise environmental regulations and firefighting in the poorer areas.
The District’s economy is underpinned by coal mining and primary industries, which has been significantly impacted by the constrained GDP growth, resulting in higher unemployment. Nevertheless, NDM has generally reported an improvement in socio-economic conditions. The further development of its agricultural sector is now being prioritised to facilitate the economic inclusion of the more rural areas. NDM does not provide any trading services and is reliant on the National Government for over 90% of its income, with the remainder comprising interest income. This provides a predictable and reliable stream of income to fund its operational and capex requirements. However, it also heavily exposes the District to the constrained financial position of the national fiscus, which has already resulted in grant income growth falling behind inflation. Expenditure patterns have evidenced an adverse trend, with a growing proportion being spent on staff and administration costs, and a lower amount on the core development support. Thus, while grants and subsidies accounted for 62% of expenditure in FY14, this decreased to 50% in FY16 to 45% in FY17. This suggests that resources are being drawn away from addressing infrastructure deficiencies.
NDM reports a R413m portfolio of cash and liquid assets, spread across the major domestic banks (FY16: R410m). This equated to 469 days cash coverage, in line with the level that has been attained in most years under review. Debt remained negligible, at R8m at FY17 and consisted mainly of the historic DBSA loans. The District has remained in a strong net ungeared position over the review period, with consistently strong credit protection metrics. There are no current plans to incur new debt.
Although NDM’s infrastructure development budget is in line with previous years, GCR notes a historical underperformance relative to the budget. If the District’s infrastructure deficit is to be meaningfully addressed, NDM will need to utilise its substantial cash resources to supplement the inflow of grants and subsidies.
The development of internally generated revenue sources by NDM would serve to diversify the earnings base, reduce dependence upon government, and bode positively from a credit risk perspective, providing upward ratings mobility. Conversely, a curtailment of grant funding or the continued failure of grant funding to keep pace with expenditure requirements 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. The international scale rating is directly linked to the sovereign rating of South Africa and thus any movement in the sovereign rating would likely have a similar impact on NDM’s international scale rating. Similarly, the Negative outlook accorded to NDM’s international scale rating reflects the Negative outlook on the sovereign rating.
| NATIONAL SCALE RATINGS HISTORY |
| Initial/last rating (October 2017) |
| Long-term: A(ZA), Short-term: A1(ZA) |
| Outlook: Stable |
| INTERNATIONAL SCALE RATINGS HISTORY |
| Initial/last rating (October 2017) |
| Long-term: BB- |
| Outlook: Negative |
ANALYTICAL CONTACTS
| Primary Analyst |
| Eyal Shevel |
| Sector Head: Corporate and Public Sector Ratings |
| (011) 784-1771 |
| shevel@globalratings.net |
| Committee Chairperson |
| Patricia Zvarayi |
| Senior Analyst: Corporate Ratings |
| (011) 784-1771 |
| patricia@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2017
GCR International Scale Local Currency to National Scale Mapping Table – South Africa, updated May 2017
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATES GLOSSARY
| Budget | Financial plan that serves as an estimate of future cost, revenues or both. |
| Credit Risk | The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due. |
| 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. |
| Interest | Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan. |
| International Scale Rating FC | International foreign currency (International FC) ratings measure the ability of an organisation to service foreign currency obligations, taking into account transfer and convertibility risk. |
| International Scale Rating LC | International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions. |
| 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. |
| Mandate | Authorisation or instruction to proceed with an undertaking or to take a course of action. A borrower, for example, might instruct the lead manager of a bond issue to proceed on the terms agreed. |
| Portfolio | A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value. |
| 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. |
| 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 ratings 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 were 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 ratings has been disclosed to Nkangala District Municipality with no contestation of the ratings.
The information received from Nkangala District Municipality and other reliable third parties to accord the credit ratings included:
- Pre-audit financial statements for the year ended 30 June 2017 (Plus four years of comparative numbers);
- Budget reports up to 2020;
- The Integrated Development Plan 2017/2018;
- Most recent schedule A and C schedule accounts; and
- 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 Nkangala District Municipality an initial rating of A(ZA), Outlook Stable