Announcements Public Rating Alerts

GCR affirms Buffalo City Metropolitan Municipality’s rating of A(ZA); Outlook Negative.

Johannesburg, 06 February 2019 — Global Credit Ratings has today affirmed the national scale Issuer ratings accorded to Buffalo City Metropolitan Municipality of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Buffalo City Metro Municipality (“BCMM”) based on the following key criteria:

The negative outlook reflects the deterioration in financial performance and the persistently higher consumer bad debts. This has been occasioned by the weak local economy, which GCR considers to be a constraint on the ratings as it has dampened income growth, while rising unemployment and consumer pressure have led to the collections challenges (as households comprise 62% of debtors). BCMM’s expense base has also been increasing ahead of income, driven by staff costs (which, at 31% of the total, exceed that of similar sized municipalities), bad debt impairments and general expenditure. Thus, notwithstanding a 10% improvement in FY18, the operating surplus remains well below historical levels.

GCR has also negatively considered the reversion to a ‘Qualified’ audit opinion by the Auditor General, which further reflected the challenges BCMM is facing in terms of billing and collections.

While cash generation did recover in FY18, the metro is still facing cash flow pressures. Specifically, the debtors absorption increased to R363m, while the lower overall working capital absorption was largely a factor of delayed payments to trade creditors (suggesting that the metro has struggled to maintain its 30 days settlement policy). In this regard, resolution of debtors collection challenges is critical to improving operational liquidity.

That said, BCMM continues to present a strong liquidity profile with the cash balance increasing to R1.8bn at FY18 (FY17: R1.7bn), equating to cash cover of 99 days (FY17: 98 days), comfortably above GCR’s benchmark of 90 days. Moreover, free cash coverage of debt remained strong at 3.9x (FY17:3.2x), while the current ratio of 1.6x (FY17:1.8x) further reflects robust levels of liquidity.

Gross debt has decreased over the review period to a low of R398m at FY18, with the gross debt to income ratio reported at a low 6.4% (FY17: 7.8%). Budgets indicate that borrowings will be raised to fund capex projects over the medium term, but BCMM’s balance sheet retains substantial capacity to absorb the additional debt, without placing undue stress on gearing and liquidity metrics.

Further supporting the ratings, BCMM’s status as a metropolitan municipality is positively considered given its role as the hub of economic activity in the region and the additional government support received. This has been evidenced by the 16% growth in grant funding in FY18.

Persistent weakening in key operating and cash flow metrics would likely lead to a downgrade. In particular, cash flow pressures could see the BCMM’s strong liquidity position deteriorate. In contrast, sustained growth in income generation from service provision, combined with improved debtors collections could lead to positive ratings progression. Accelerated implementation of capex, without placing strain on gearing metrics, would also be positively considered.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (August 2003)   Last rating (February 2018)
Long term: BBB(ZA); Short term: A3(ZA)   Long term: A(ZA); Short term: A1(ZA)
Outlook: Stable   Outlook: Stable
     
     

ANALYTICAL CONTACTS

Primary Analyst   Secondary Analyst
Eyal Shevel   Danisile Munyai
Sector Head: Corporate and Public Sector Ratings   Junior Analyst
(011) 784-1771   (011) 784-1771
shevel@globalratings.net   danisilem@globalratings.net
     
Committee Chairperson    
Patricia Zvarayi    
Senior Credit Analyst    
(011) 784-1771    
patricia@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Public Entities, updated February 2018

Buffalo City Metropolitan Municipality reports (2003-2018)

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 CORPORATE GLOSSARY

Capital The sum of money that is invested to generate proceeds.
Current Ratio A measure of a company’s ability to meet its short-term liabilities and is calculated by dividing current assets by current liabilities. Current assets are made up of cash and cash equivalents (‘near cash’), accounts receivable and inventory, while current liabilities are the sum of short-term loans and accounts payable.
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.
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. 
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.
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.
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 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 ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Buffalo City Metropolitan Municipality participated in the rating process via face-to-face management meetings 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 Buffalo City Metropolitan Municipality.

The information received from Buffalo City Metropolitan Municipality and other reliable third parties to accord the credit ratings included;

  • Audited financial statements for the year ended 30 June 2018 (Plus four years of comparative audited numbers)
  • Auditor General report for the year ended 30 June 2018
  • Budget reports up to 2021
  • The Integrated Development Plan for 2017/2018
  • Detailed presentation on ongoing capex
  • Schedule C schedule accounts for 4Q 2018
  • 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 affirms Buffalo City Metropolitan Municipality’s rating of A(ZA); Outlook Negative.



ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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