Johannesburg, 28 Nov 2017 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to eThekwini Metropolitan Municipality at 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 ratings to eThekwini Metropolitan Municipality (“eThekwini”) 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 consistently reported strong socio economic statistics and robust economic activity underpinned by its large port. Moreover, the city continues to make progress on new projects to stimulate economic growth.
The Metro has reported an 8.2% CAGR in income of over the five-year review period, underpinned by rising services and tax revenue. This has partly been a factor of higher tariffs, but also reflects the strong underlying economic activity, which has seen demand for electricity and water grow, whilst new developments have bolstered property taxes. Costs have risen below the rate of income growth although there has been relatively steep increases over the past two years. In FY17, this was driven by contracted services and general expenses, as well as continued wage inflation, indicating higher consumptive expenditure. The staff cost to income ratio rose to 27%, also evidencing the cost pressure, albeit well within GCR’s benchmark.
Although debtors collections have steadily improved, there was a spike in electricity debtors at FY17. The high outstanding balance from the Department of Human Settlements continues to impact eThekwini’s liquidity, with payment being delayed by the worsening financial position faced by provincial and national government. Nevertheless, robust cash generation has allowed eThekwini to redeem additional debt, with gross debt having declined from R10.2bn at FY15 to R9.2bn at FY16 and R8.8bn at FY17. Combined with the rising income, gross debt to income has declined from 41% at FY13 to 27% at FY17, whilst net debt registered at just 10.4% at FY17. Operating cash flow coverage of interest remained strong at 5.8x (FY16: 7.4x).
Whilst cash was utilised to meet capex requirements and redeem debt, the discretionary cash balance remained substantial at R5.5bn (FY16: R6.2bn). However, total cash on hand fell to 85 days (FY16: 103 days), and discretionary cash to 73 days (FY16: 92 days). This was the first time over the review period that cash holdings fell below GCR’s benchmark of 90 days.
eThekwini achieved another clean audit in FY16 and expects another clean audit for FY17. Most irregular expenditure has been condoned and the major emphasis of matter relates to ongoing water losses, which are progressively being addressed.
Looking ahead, a ratings upgrade is dependent on continued strong growth in major income items, as well as the maintenance of strong cash flows. Bringing large projects to fruition, and realising the positive impact on municipal income, would support financial strength. Conversely, a sustained deterioration in debtors performance, and in particular electricity and provincial debtors, would negatively impact cash flows and could lead to higher gearing metrics. A reduction in government grants could also increase funding pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2001)|
|Long term: AA-(ZA); Short term: A1(ZA)|
|Last rating (October 2016)|
|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 2017
eThekwini rating reports, 2001–2016
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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 provided the information used for the rating review, but no management meetings or other correspondence was held. Nevertheless, the quality of information received was considered adequate to accord the rating.
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:
- Unaudited financial results of eThekwini for 2016/2017;
- Four years historical audited financial statements
- Industry comparative data;
- The 2016/2017 – 2018/2019 medium term budgets;
- The AG report on municipality for 2015/2016;
- Section 52/schedule C reports for eThekwini; and
- Statutory documentation for the category A municipalities.
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 rating at AA(ZA); Outlook Positive