Johannesburg, 29 May 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Buffalo City Metropolitan Municipality of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
As the rating contract with GCR has lapsed, the ratings accorded to Buffalo City Metropolitan Municipality have subsequently been Withdrawn.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Buffalo City Metropolitan Municipality (“BCMM”) based on the following key criteria:
All income items have evidenced double digit growth, with a compound annual growth rate (“CAGR”) of 18.1% over the review period. Moreover, while grant funding has increased strongly since the municipality was accorded the status of a metropolitan municipality, the general trend has seen a slight decrease in the reliance on grant funding in favour of internally generated sources of revenue, in particular service provision.
Expenditure growth has been below income, resulting in large surpluses in F13 and F14. Moreover expenditure patterns have improved, with salaries and wages rising at below the average (to account 26.7% of expenditure, well below GCR’s 30% benchmark), while repairs and maintenance spend has increased at a 20% CAGR over the review period. While BCMM clawed back some electricity and water profit margin in F14 (31.2% in F14 vs 28.9% in F13), maintaining the margin above 30% will likely prove challenging given the higher than budgeted tariff increases from Eskom likely to materialise.
Total cash rose to R2.1bn at FYE14 (FYE13: R1.8bn), of which R1.9bn was free cash (FYE13: R1.4m), despite the increased capex and utilisation of previous unspent conditional grants. Thus, free cash cover rose to 165 days, compared to just 39 days at FYE10, while free cash coverage of debt rose above 3x, from 0.5x at FYE10. The build-up of cash reflects a deliberate strategy to ensure resources are available for replacement capex and/or development projects. Although capex continues to fall below budget, there was a substantial increase in the real quantum of spend in F13 and F14. As capacity is developed within the metro, BCMM expects capex to increase, supported by the substantial cash resources.
The Auditor General (AG) issued BCMM a qualified audit opinion for F14, albeit that substantial progress has been made in reducing fruitless and wasteful, as well as irregular expenditure. Whilst BCMM has approved the write-off of R1.1bn of such expenditure, the AG has only condoned R584m, requiring further investigation on the remainder. This notwithstanding, note is taken of charges of misappropriating funds against the city manager and other senior officials.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August/2003)|
|Long term: A(ZA); Short term: A1-(ZA)|
|Last rating (May/2014)|
|Long term: A(ZA); Short term: A1(ZA)|
|Sector Head: Corporate & Public Sector Debt Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2015
Buffalo City Metropolitan Municipality reports (2003-2013)
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|CAGR||The compound annual growth rate is the year-on-year percentage growth rate of an investment over a given period of time. It is found by calculating:|
|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.|
|Liquidity Risk||The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.|
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SALIENT FEATURES OF ACCORDED RATINGS
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.
Buffalo City Metropolitan Municipality did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.
The credit rating/s has not been disclosed to Buffalo City Metropolitan Municipality.
The information received from Buffalo City Metropolitan Municipality and other reliable third parties to accord the credit rating(s) included;
- Audited financial results of Company per 30/06/2014
- 5 years of comparative numbers
- A breakdown of facilities available and related counterparties
- Industry comparative data
The ratings above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the ratings.