Johannesburg, 10 Nov 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to the City of Tshwane Metro Municipality of A(ZA) and A1-(ZA) in the long term and short term respectively; with the outlook reviewed to Negative.
As the rating agreement with GCR has not been renewed, the ratings accorded to City of Tshwane Metro Municipality have subsequently been withdrawn.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to the City of Tshwane Metro Municipality (“Tshwane”) based on the following key criteria:
Tshwane has reported strong growth in total income over the review period, mainly deriving from internally generated sources (most significantly trading services). Nonetheless, Tshwane remains reliant on operational grants to perform certain stipulated functions. Expenditure has been well contained over the review period, and at 28% in F14 the ratio of staff costs to total expenses was in line with historical levels and below GCR’s benchmark of 35%.
While debt has increased from R5.1bn at FYE10 to R9.3bn at FYE14, gross debt to income has remained relatively stable at around 40% over the review period, indicating moderate gearing. Nonetheless, the key concern is liquidity. With a cash balance of R797m at FYE14 (FYE13: R1.3bn), cash on hand amounted to just 12 days in F14, similar to the weak coverage reported in previous periods. The low cash position has been caused by the metro’s inability to adequately collect on its outstanding debtors, with gross debtors at a high 40% of revenue at FYE14. As such, a further R1bn impairment to debtors was incurred in F14. The metro has indicated that it will be taking drastic measures (cutting services) to recover the outstanding debt from households, businesses and neighbouring local municipalities, but improved collection rates need to be demonstrated and sustained. This must be achieved within an environment of slowing domestic growth and increasing living expenses, which continue to constrain consumers. Additionally, the weaker economy is increasing the burden on municipalities to provide social services.
Liquidity pressure has also limited Tshwane’s ability to spend on capex, resulting in an inability to raise spending to levels necessary to address the significant infrastructure backlog.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Apr/2001)
Long term: A(ZA); Short term: A2(ZA)
Last rating (Dec/2013)
Long term: A(ZA); Short term: A1-(ZA)
Sector Head: Corporate & Public Sector Debt Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated April 2014
City of Tshwane Metropolitan Municipality rating reports (2001-2013)
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES 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.
City of Tshwane Metro Municipality did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.
The information used to accord the credit rating included the 2014 annual financial statements (plus four years of comparative numbers) and other publicly available documentation as required by the Municipal Finance Management Act No. 56 of 2003.
The ratings above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
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.
The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.
GCR affirms City of Tshwane Metro Municipality’s rating of A(ZA); Outlook Negative.