Johannesburg, 19 November 2018 — Global Credit Ratings has today affirmed the long term and short term national scale Issuer ratings assigned to eThekwini Metropolitan Municipality of AA+(ZA) and A1+(ZA) respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to eThekwini Metropolitan Municipality (“eThekwini”, “the metro”) based on the following key criteria:
EThekwini is one of eight metropolitan municipalities in South Africa, encompassing the economic centre of Durban. The metro has a diverse economic base, comprising manufacturing, logistics and tourism, which has helped it sustain economic growth and job creation above the national performance levels.
EThekwini has a long track record of unqualified audit reports and the same is expected in FY18, demonstrating the strong financial management. However, GCR notes that irregular expenditure did increase in FY18 and water losses remain persistently high.
Income growth accelerated in FY18, supported by a spike in rates income (due to the updated valuation roll), while key income items such as services revenue and grants, continue to show and upward trends. Nevertheless, rising staff costs and service deliver charges, have seen expenditure climb a relatively higher rate, reducing the operating margin somewhat. Strong surpluses support the rating, but the trend provides some early signs of financial strain if not managed.
Whereas, eThekwini has historically evidenced strong debtors management, there has been a noticeable deterioration in collections, with gross debtors increasing by 24% in FY17 and 27% in FY18. This is partly due to the migration to a new billing system (which will have long term benefits), but also reflects consumer strain in the current economic environment, which may prove more difficult to correct.
EThekwini’s strong ratings are supported by its very low gearing and strong liquidity characteristics. In this regard, net debt to income was just 8.5% at FY18 (FY17: 10.5%), while a net interest inflow was reported. Funding flexibility is supported by strong access to debt funding from both public and private sector sources, as well as DFIs. The metro has also benefitted from long tenor debt, whilst the amortising profile mitigates any maturity concentrations.
Cash holdings remained high at R6.1bn at FY18 (FY17: R6.3bn), but days cash coverage (excluding unspent conditional grants) fell to 66 days (FY17: 74 days). While cash coverage is congruent with the current rating, the weaker ratios do highlight the potential for future liquidity strain if expenditure continues to increase faster than income. Budgets indicate that internal cash resources will be necessary to meet the accelerated capex. While the robust current cash balance does provide headroom, it is critical that operating surplus projections are met to ensure liquidity metrics and gearing levels do not deteriorate.
Positive rating movement is dependent on the demonstrated ability to consistently achieve capex targets, whilst maintaining conservative gearing. Continued strong growth in major income items by bringing large projects to fruition, and realising the positive impact on municipal income, would also be positively considered. Conversely, a weaker economy that leads to a deterioration in debtors performance would negatively impact cash flows and could lead to higher gearing metrics. Lower income, rising indigent costs or a reduction in government grants could also increase funding pressure, and thus result in a ratings downgrade.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2001)|
|Long term: AA-(ZA); Short term: A1(ZA)|
|Last rating (February 2018)|
|Long term: AA+(ZA); Short term: A1+(ZA)|
|Sector Head: Corporate and Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2018
eThekwini rating reports, 2001–2018
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|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing 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.|
|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.|
|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.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|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.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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 are 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 ratings have been disclosed to eThekwini Metropolitan Municipality.
The information received from eThekwini Metropolitan Municipality and other reliable third parties to accord the credit ratings included:
- Unaudtied financial statements for 2017/2018
- Audited financial results of eThekwini for 2016/2017 plus four years comparative results;
- The 2017/2018 Integrated Development Plan;
- The 2018/2019 – 2020/2021 medium term budgets;
- The AG report on municipality for 2016/2017;
- Section 52/schedule C reports for eThekwini; and
- Statutory documentation for the category A municipalities.
- Industry comparative data;
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 eThekwini Metropolitan Municipality’s at AA+(ZA); Outlook Stable