Announcements

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

Johannesburg, 20 February 2018 — 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 Stable.

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:

BCMM’s status as a metropolitan municipality is positively considered, given the greater operational freedom it offers, as well as the additional government support received. This is demonstrated through uptick in grant income from R902m in FY12 to around R1.6bn in FY16 and FY17. Nonetheless, BCMM’s operating performance has been constrained by the weak economic environment in the region. The weakness in the core industrial sector in particular has resulted in an increase in the regional unemployment rate and growing indigent population. As 69% of rates derives from the residential sector, this has negatively impacted income and liquidity.

BCMM evidenced 2% income growth in FY17, constrained by subdued electricity receipts and a decline in grants, despite the strong growth in assessment rates and water services. Moreover, growth in expenditure exceeded income, resulting in a 61% drop in the surplus to R253m in FY17 (FY16: R645m). The key operating challenge for BCMM remains the deterioration in the debtors book profile. Specifically, gross consumer debtors climbed to over R2bn (FY16: R1.87bn) and total net debtors increased 17% to R1.3bn at FY17, which is of some concern. This was despite 48% growth in debt impairments. To improve collections, BCMM is implementing prepaid and smart electricity metering, while a debt collections contract is being considered.

The metro reported a working capital absorption of R855m in FY17 (FY16: R182m), which saw the cash balance lower to R1.7bn (FY16: R2.4bn). However, the liquidity profile has remained strong, with cash on hand reported at 92 days (FY16: 149 days) and the current ratio at 1.9x in FY17 (FY16: 2.0x). Gross debt amortised to a low R446m at FY17 (FY16: R497m), while the gross debt to income ratio showed a downward trend over the review period from 14.9% in FY13 to 7.2% in FY17 (FY16: 8.3%). Although BCMM has indicated it may raise borrowings to fund capex going forward, based on projections, the gearing ratio is likely to remain low between 10-20%.

BCMM attained an unqualified report from the Auditor General for FY17. Where emphasis of matters were drawn, these related to the slow recovery of overdue accounts and irregular expenditure, with the quantum of such matters decreasing.

The successful implementation of ongoing operational projects that improve efficiencies and aid debtors collection would be positively considered. In the medium term, an upgrade is dependent on capex projects that stimulate economic activity and employment growth, and enhance sources of income. In contrast, the sustained weakness in the local economy, particularly the industrial sector, could further impair the debtors book performance, constraining cash flows which would bode negatively for the ratings.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (August 2003)    
Long term: BBB(ZA); Short term: A3(ZA)    
Outlook: Stable    
     
Last rating (November 2016)    
Long term: A(ZA); Short term: A1(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst    
Eyal Shevel    
Sector Head: Corporate and Public Sector Ratings    
(011) 784-1771    
shevel@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 2017

Buffalo City Metropolitan Municipality reports (2003-2016)

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.

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 with no contestation of the ratings.

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 2017 (Plus four years of comparative audited numbers)
  • Budget reports up to 2020
  • The Integrated Development Plan for 2017/2018
  • Most recent schedule C schedule accounts
  • Most recent statement of comparison of budget and actual information

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 Stable.

image_pdfPDF View

Leave a Reply



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.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright 2019 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.