Announcements

GCR affirms eThekwini Metropolitan Municipality rating of AA-(ZA); Outlook Positive.

Johannesburg, 16 Oct 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to eThekwini Metropolitan Municipality of AA-(ZA) and A1+(ZA) in the long term and short term respectively; with the outlook accorded as Positive.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to eThekwini Metropolitan Municipality (“eThekwini”) based on the following key criteria:

In 2010, following the high level of capex undertaken in preceding years and the significant erosion of cash holdings, GCR downgrade eThekwini’s long term rating to AA-(ZA). Since this time, substantial growth in revenue and earnings has been reported, with a significant improvement in cash balances and liquidity. This saw GCR upgrade the metro’s short term rating to A1+(ZA) in 2013; the highest short term national scale rating possible. Following the 2014 rating review, GCR has placed eThekwini’s long term rating on a positive outlook, being reflective of the sustained improvement in key credit risk metrics that has been reported since 2010, with net gearing at FYE14 being at half the level reported at FYE10 and days’ cash on hand at triple the FYE10 level.

eThekwini is a South African metropolitan municipality, with a large and diverse income base that includes internally generated revenue (mostly rates and services income), as well as sizeable grants from government and a share of the Fuel Levy. The municipality reports a sound financial profile, underpinned by its strongly cash generative operations. This has facilitated robust debt serviceability and has seen sizeable surpluses reported over the review period (totalling R10.8bn over the five years). eThekwini reports a moderately geared balance sheet, as a result of prudent debt raising activity and careful planning/management of expenditure. In this regard, total debt has receded from its FYE12 high of R10.7bn to R10.2bn at FYE14 (FYE13: R9.9bn), whereas cash holdings have risen over the same period from R4.8bn to R5.5bn (FYE13: R5.2bn). As such, gross and net debt to total income have reduced from respective values of 49% and 30% at FYE12 to 40% and 19% at FYE14. The sizeable cash balances, strong cash generation and amortising profile of most of the metro’s debt results in a strong liquidity profile. In this regard, eThekwini reported over 90 days cash on hand at FYE14 (excluding unspent conditional grants), while operating cash flows covered gross interest by a sound 5.9x in F14.

Akin to most other municipalities, eThekwini reports large gross debtor balances and a high level of provisioning. Furthermore, rising consumer indebtedness and duress is being reported in South Africa at present, which is likely to negatively affect the metro’s debtors book performance over the medium term. However, comfort is taken from the conservative provisioning and write-off policy of the metro, as well as its extensive credit control function. Going forward, the maintenance of the current gearing and liquidity metrics, in spite of the weak state of the domestic economy, would drive an upward movement of the long term rating. Conversely, the ratings could come under pressure from a reduction in government grants or increased uncertainty regarding future such receipts. In addition, deteriorating debtor collection rates, affecting operating cash flows, could impact credit risk metrics, which in turn would bode negatively for the rating.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Sep/2001)
Long term: AA-(ZA); Short term: A1(ZA)
Outlook: Stable

Last rating (Oct/2013)
Long term: AA-(ZA); Short term: A1+(ZA)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Richard Hoffman
Analyst
(011) 784-1771
Hoffman@globalratings.net

Committee Chairperson
Eyal Shevel
Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
Shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Public Entities, updated April 2014
eThekwini Metropolitan Municipality rating reports, 2001-2013

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.

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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

eThekwini 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 credit rating/s has been disclosed to eThekwini Metropolitan Municipality with no contestation of the rating.

The information received from eThekwini Metropolitan Municipality and other reliable third parties to accord the credit rating included the 2014 pre-audit annual financial statements (plus four years of comparative numbers), 2014/2015-2016/2017 budget reports, the Integrated Development Plan and other publicly available documentation as required by the Municipal Finance Management Act No. 56 of 2003.

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS REPORT

Balance Sheet

Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Credit Risk

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.

Liquidity Risk

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.

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.

GCR affirms eThekwini Metropolitan Municipality rating of AA-(ZA); Outlook Positive.

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