Announcements Corporate Public Sector Rating Alerts

GCR affirms City of Johannesburg Metropolitan Municipality’s Long Term National Scale Rating of AA-(ZA) and maintains its Stable Outlook

Rating Action

Johannesburg, 30 July 2021 – GCR Ratings (“GCR”) affirms the national scale long term and short term Issuer ratings assigned to City of Johannesburg Metropolitan Municipality of AA-(ZA), and A1+(ZA) respectively. The outlook is Stable.

Rated Entity / Issuer Rating class Rating scale Rating Outlook / Watch
City of Johannesburg Metropolitan Municipality Long Term Issuer National AA-(ZA) Stable Outlook
Short Term Issuer National A1+(ZA)

Rating Rationale

The ratings affirmation for City of Johannesburg Metropolitan Municipality (“CoJ” or “the metro”) balance its position as the economic center of South Arica and well diversified sources of internally generated revenues (IGR), against high gearing and a moderate liquidity profile, exacerbated by the COVID-19 related disruptions.

CoJ’s operating performance has remained fairly stable despite some of the persistent underlying weaknesses, such as service delivery backlogs. a reduction in overall collection rates, as well as the challenges presented by the COVID-19 disruptions. As collection procedures could not be fully implemented during the hard lockdown, and residents and commercial property owners faced affordability pressures, gross consumer debtors increased by 31% at FY20 to R34.9bn (FY19: R26.5bn), with the bad debts provision growing from R20.4bn (77% of debtors) at FY19 to R28bn (80%) at FY20. Nevertheless, while the average collection rate decreased to 86% in FY20 (FY19: 89%) it has since improved to around 90% through FY21. Further improvements will, however, be dependent on renewed economic growth.

Income growth of 6% was achieved for FY20, mainly driven by services revenue. However, this was offset by a relatively higher 9% increase in expenditure. One of the major reasons was a steep rise in staff costs, as many positions were insourced, but this should normalise in FY21 and going forward. With somewhat stronger income growth now projected for FY21, GCR expects the operating surplus to remain high.

COVID-19 disruptions negatively impacted both collections and capital project delivery during FY20. As a result, service delivery levels, repairs and maintenance as well as infrastructure development suffered, evidenced by a lower 73% capex implementation rate at FY20 (FY19: 93%), and expectations of around the same level in FY21. GCR considers this to be a key longer term risk, although the CoJ has introduced a capital development plan that budgets for a total of R94bn in spend over a 10-year horizon, and anticipates that only 25% of such budget will need to be funded with external debt.

CoJ’s financial position remains constrained by its high gearing, as gross debt amounted to R22.3bn at FY20 (FY19: R22.2bn) and is projected to increase to c.R23bn at FY21. Nevertheless, credit protection metrics have remained moderate due to income growth, with net debt to total income improving to 25.8% at FY20 (FY19: 27%). However, operating cashflow coverage of gross debt fell to 28.2% (FY19: 38.5%) on the back of weaker operating cash flows, whilst coverage of interest decreased to 3.6% (FY19: 4.2%). Credit protections metrics are anticipated to remain in the moderate range over the rating horizon, with net debt to total income trending around the 28% level. Concerns regarding the high level of debt are somewhat mitigated by the long tenor of CoJ’s debt (with most debt facilities amortising over a 10-20 year period), its demonstrated diverse funding relationships and the metro enjoying fixed interest rates on the majority of its funding facilities.

GCR positively notes that CoJ has maintained robust cash balances despite the COVID-19 crisis, resulting in 12-month liquidity coverage for FY22 of around 1.6x, underpinned by a projected R5.9bn in cash on hand at FY21, as well as c.R2.7bn in its sinking fund and an unutilized short term facility of R675m. Against this, capex of around R8.2bn is forecast for FY22, as well as debt maturities of c.R1.2bn. GCR notes however the large bond redemption of R2.3bn during FY23 which will likely reduce the metro’s 24-month liquidity coverage ratio somewhat (although this is largely covered by the sinking fund). CoJ’s improved liquidity profile is also supported by solid cash on hand of 58 days at FY21 and a similar projected level for FY22. With the metro implementing its aforementioned 10-year capex program, partly funded by rising debt, longer term liquidity strength is ultimately dependent on growth in cash flows, which in turn will be determined by rising IGR and improving collection rates.

CoJ’s robust entity profile remains critical to its rating. The metro is the economic center of South Africa, contributing 15% to the country’s GDP, anchored by its broad diversification and its position as the economic gateway to the country and continent at large. Notwithstanding this, an increasing population alongside rising unemployment and poverty levels in certain areas, will continue to increase the burden of CoJ’s service delivery responsibilities and infrastructure backlogs.

Outlook Statement

The Stable Outlook reflects GCR’s expectation that, despite ongoing challenges arising from COVID-19 related disruptions, the metro has sufficiently strong and diversified income streams to maintain its financial profile, as well as adequate liquidity sources.

Rating Triggers

Positive rating action could derive from improved revenue collection that strengthens the liquidity assessment and enables the metro to further reduce gearing levels. Negative rating action could arise should an improvement in collection rates not be evidenced, or if COVID-19 disruptions continue to increase the costs of service delivery without compensation. This would likely lead to an increase in debt funding and weaker credit protection metrics as a result of deteriorating cash flows.

Analytical Contacts

Primary analyst Lara Krug Senior Analyst: Corporate & Public Sector Ratings
Johannesburg, ZA Larak@GCRratings.com +27 11 784 1771
Committee chair Eyal Shevel Sector Head: Corporate & Public Sector Ratings
Johannesburg, ZA shevel@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 Rating Scales, Symbols and Definitions, May 2019
GCR Country Risk Scores, July 2021

Ratings History

City of Johannesburg Metropolitan Municipality

Rating class Review Rating scale Rating class Outlook Date
Long Term Issuer Initial National AA(ZA) Stable Oct 2018
Short Term Issuer Initial National A1+(ZA)
Long Term Issuer Last National AA-(ZA) Stable July 2020
Short Term Issuer Last National A1+(ZA)

RISK SCORE SUMMARY

Rating Components & Factors Risk scores
Operating environment 14.00
Double country risk score 14.00
Adjustments 0.00
Business profile 3.00
LRG Profile 3.00
Operating Performance 0.00
Management and governance 0.00
Financial profile (2.00)
Leverage and capital structure (1.00)
Liquidity (1.00)
Comparative profile 0.00
Group support 0.00
Government support floor 0.00
Total Risk Score 15.00

Glossary

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Covenant A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.
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.
Income Money received, especially on a regular basis, for work or through investments.
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
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.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Offset A right (Right of Offset) to set liabilities against assets in any dispute over claims.
Operating Cash Flow A company’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 Outlook See GCR Rating Scales, Symbols and Definitions.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.
Upgrade The rating has been raised on its specific scale

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings were 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to City of Johannesburg Metropolitan Municipality. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

City of Johannesburg 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 City of Johannesburg Metropolitan Municipality and other reliable third parties to accord the credit ratings included:

  • Audited financial results of City of Johannesburg Metropolitan Municipality 2018/2019 (Plus four years of comparative numbers);
  • Unaudited financial results of City of Johannesburg Metrpolitan Municipality 2019/2020
  • Budget reports up to 2020/2023;
  • The Integrated Development Plan 2020/2021;
  • Schedule A accounts to December 2019
  • MTB 2020-21 Final Approved Budget
  • Market presentations
  • CoJ Liability Profile
  • Various Management Accounts
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