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)|
|Last rating (November 2016)|
|Long term: A(ZA); Short term: A1(ZA)|
|Sector Head: Corporate and Public Sector Ratings|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Public Entities, updated February 2017
Buffalo City Metropolitan Municipality reports (2003-2016)
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|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.