Johannesburg, 21 November 2019 – GCR Ratings (“GCR”) has affirmed the national scale long term and short ratings assigned to Buffalo City Metropolitan Municipality of A(ZA) and A1(ZA) in the long term and short term respectively, with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Buffalo City Metropolitan Municipality||Issuer Long Term||National||A(ZA)||Stable Outlook|
|Issuer Short Term||National||A1(ZA)|
GCR announced that it had released new criteria for rating Local rand Regional Governments in June 2019. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the review for Buffalo City Metropolitan Municipality under the new methodology, and the ratings have been removed from ‘Under Criteria Observation’.
Buffalo City Metropolitan Municipality’s (“BCMM”) ratings weight its strong financial position due to its ungeared balance sheet, against the weak economic conditions in the Municipality, which have negatively impacted operating performance.
Cognisance is taken of BCMM’s status as a metropolitan municipality, albeit that its population is smaller than the other metros, with less economic diversification. As the economy is weighted towards industrial production, the municipality has suffered from the weakness in this sector in recent years, most evident in growing unemployment and higher levels of consumer strain. BCMM’s credit risk profile has also been negatively impacted by its weak historic audit outcomes, and deficiencies in supply chain management that have led to high cumulative irregular expenditure, although steps to improve management and governance are noted.
BCMM’s operating performance has come under pressure from weak economic growth, which has resulted in relatively slower income growth and sustained debtors collection challenges. This has been exacerbated by rising electricity and water losses. However, GCR notes the substantial growth in income in FY19, derived from core rates income. Cost increases remain a constraint on the operating surpluses despite enhanced cost containment measures. Notwithstanding the potential negative impact on cash, BCMM’s accelerated capital development strategy is positively considered, and should contribute to growth in the tax base and services income in the medium to long term.
Supporting the credit profile, BCMM reflects an ungeared balance sheet, with unrestricted cash of R960m reported at FY19 (FY18: R1.6bn), against gross debt of R346m (FY18: R398m). Although BCMM intends raising a further R438m in debt, GCR does not expect this to alter the net ungeared position, as this debt will only be drawn progressively over a three year period as the project to which it pertains is implemented. The strong leverage assessment is somewhat counterbalanced by funding concentration to Development Bank of South Africa, although the new debt is likely to be raised from private sector funders, demonstrating access to capital.
BCMM’s liquidity coverage of 1.5x is also reflective of the net strong cash position, and only low debt maturities over the next 12 months. However, GCR takes cognisance of the intended acceleration in economic capex translating to potentially large cash outflows going forward. In this regard, the gross cash position decreased by over R600m in FY19, as debtors collections continued to deteriorate, whilst there was increased capital spend. The weaker cash position was further evidenced in the decline in cash on hand to 68 days at FY19, from historical levels well above 100 days. GCR will continue to monitor cash flow trends, with the potential for negative action if the working capital management does not improve.
The Stable Outlook reflects GCR’s expectation that BCMM will continue to report a net ungeared financial profile, and adequate liquidity.
Positive rating action is dependent on a meaningful improvement in operating performance, that translates into strong income growth, and sustained positive cash flows. An improvement in the audit outcome, combined with strengthened supply chain processes would also be positively considered. Negative rating action could arise if is debtors collections problems persist, leading to a decrease in cash holdings and weaker liquidity metrics.
|Primary analyst||Eyal Shevel||Sector Head: Corporate and Public Sector|
|Johannesburg, ZA||shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Patricia Zvarayi||Deputy Sector Head: Corporate and Public Sector|
|Johannesburg, ZA||patricia@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Local and Regional Governments, June 2019|
|GCR Country Risk Scores, June 2019|
Buffalo City Metropolitan Municipality
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||BBB(ZA)||Stable||Aug. 2003|
|Issuer Short Term||National||A3(ZA)|
|Issuer Long Term||Last||National||A(ZA)||Negative||Feb. 2019|
|Issuer Short Term||National||A1(ZA)|
RISK SCORE SUMMARY
|Country risk score||15.00|
|Management and governance||-1.00|
|Leverage and Capital Structure||2.00|
|Capital Markets||The part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term debt securities.|
|Country Risk||The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.|
|Credit Rating||See GCR Rating Scales, Symbols and Definitions.|
|Debtor||The party indebted or the person making repayments for its borrowings.|
|Downgrade||The rating has been lowered on its specific scale.|
|DMTN||Domestic Medium Term Notes.|
|Issuer Ratings||See GCR Rating Scales, Symbols and Definitions.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Operating Cash Flow||An entity’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.|
|Rating Horizon||The rating outlook period, typically a period of 18-24 months.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term||Current; ordinarily less than one year.|
|Upgrade||The rating has been raised on its specific scale.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
SALIENT POINTS 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.
The credit rating has been disclosed to Buffalo City Metropolitan Municipality. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Buffalo City 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 information received from Buffalo City Metropolitan Municipality and other reliable third parties to accord the credit rating included:
- Unaudited financial results of Buffalo City Metropolitan Municipality
- Four years historical audited financial statements ;
- Budget reports up to 2020/2021;
- The Integrated Development Plan 2019/2020;
- Schedule A accounts to June 2019;