Johannesburg, 8 July 2021 – GCR Ratings (“GCR”) has affirmed the national scale long and short term issuer ratings assigned to eThekwini Municipality at AA+(ZA) and A1+(ZA) respectively, with the outlook revised to Positive, from Stable.
|Rated Entity||Rating class||Rating scale||Rating||Outlook / Watch|
|eThekwini Municipality||Long Term Issuer||National||AA+(ZA)||Positive Outlook|
|Short Term Issuer||National||A1+(ZA)|
The ratings affirmation and change in outlook to Positive reflects eThekwini Municipality’s (“eThekwini” or “the Metro”) sustained low leverage, strong credit protection metrics and ample liquidity through the cycle. This has been facilitated by a relatively strong operating performance, which is expected to allow the Metro to quickly rebound from COVID-19 related disruptions.
eThekwini’s strong financial profile is underpinned by its relatively moderate gearing and high cash holdings. Thus, gross debt has remained in the R8bn to R9bn range over most years under review, with cash holdings trending around R6bn. As the Metro utilised internal resources to meet operating costs during the hard lockdown, cash decreased to around R4.5bn at FY20, although cash holdings have rebounded to around R5.3bn at FY21. Accordingly, credit protection metrics remain very strong, with net debt to total income at around 12% at FY20, and a similar level estimated for FY21. Cash flow coverage of debt did deteriorate somewhat in FY20, as cash flows were impacted by lower collections during the lockdown, but remained firm at around 40% and is expected to increase to between 50% to 60% over the medium term. Operating cash flow coverage of interest is also around 5x on a gross basis, but has been in excess of 30x after accounting for interest income. Access to debt remains very strong, with facilities derived from a range of local banks, as well as local and international development agencies. As almost all the debt is long term and amortising, there are no maturity concentrations. During 2020 eThekwini registered a R10bn bond programme, which will further diversify sources of funding.
The strengthening financial profile has been supported by the relatively resilient operating performance through COVID-19. Measures to cut expenditure were implemented at the beginning of the pandemic and additional expenditure has only been permitted once monthly collections returned to levels above 90%. As a result of the expenditure containment measures, eThekwini still posted a small operating surplus for FY20, and monthly accounts indicate a R1.9bn surplus for the 11 months to 31 May 2021. Aside from this, eThekwini has demonstrated strong growth in own source revenue over the long term, which is likely to continue. However, as GCR expects capital grants to be more subdued, the Metro will need to fund a larger portion of capex internally.
The liquidity assessment reflects sources versus uses coverage of around 1.85x. This is underpinned by the R5.5bn in cash on hand, an unutilised overdraft of R800m and strong projected income. Against this, capex of around R5bn p.a. is forecast, but around 65% will be funded through grants, whilst debt service obligations are around R700m-R1bn. However, the liquidity assessment has been somewhat tempered by the high level of contingent liabilities, which could impact cash flows if they materialise.
ETH is a key hub of economic activity, representing approximately 7% of domestic GDP and just over 60% of the KwaZulu Natal province’s productivity. As home to Africa’s busiest port, it is a strategic gateway to the continent and rest of the world, and has extensive transportation infrastructure, which has been supportive of the establishment/emergence of certain secondary industries and related tertiary services. The Metro continues to draw inward migration, but is seen as losing skilled labour to larger Metros. Its economic growth has also slowed, converging towards weak national metrics, while the tax base has been relatively unchanged over several years. Whilst progress on catalytic projects is noted, stronger economic progression is only achievable in the medium term, on the back of national policy certainty, as well as improved business and consumer confidence.
Management and governance is now considered neutral, as the political disruptions have been resolved, and there is a stronger working relationship between the political and executive leadership of the Metro. The Auditor General gave the metro another unqualified audit opinion, whilst there was also a reduction in irregular expenditure. eThekwini is targeting a clean audit report over the next two years.
The positive outlook reflects eThekwini’s strong performance and robust financial profile through the rating cycle. Accordingly, GCR may raise the rating if service delivery and operating performance meaningfully improves post the COVID-19 disruptions, whilst debt and liquidity metrics remain robust.
Positive rating action is dependent on 1) meaningful growth in own-source revenue that facilitates renewed high operating surpluses; 2) recovery in cash flows and cash flow coverage of debt to the 50% to 60% range; 3) attainment of clean audit outcome and further tightening of supply chain processes; 4) orderly transition of senior management and 5) maintenance of strong financial metrics.
Negative rating action may derive if there is a meaningful deterioration in operating performance, such that cash flows decrease and credit protection metrics weaken.
|Primary analyst||Eyal Shevel||Sector Head: Corporate and Local Authority Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|GCR Rating Scales Symbols and Definitions, May 2019|
|Criteria for Rating Local and Regional Governments, June 2019|
|GCR’s Country Risk Scores, published July 2021|
|Rating scale||Review||Rating class||Rating||Outlook/Watch||Date|
|Long Term Issuer||Initial||National||AA-(ZA)||Stable Outlook||October 2001|
|Short Term Issuer||National||A1(ZA)|
|Long Term Issuer||Last||National||AA+(ZA)||Stable Outlook||Aug 2020|
|Short Term Issuer||National||A1+(ZA)|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country & sector risk score*||14.00|
|Management & governance||0.00|
|Leverage and capital structure||1.00|
|Government support floor||0.00|
*The country risk score serves as a proxy for sector risk.
|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.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings 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; 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 the rated entity. 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.
The rated entity participated in the rating process via management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered to be adequate, and has been independently verified where possible. The information received from the rated entity and other reliable third parties to accord the credit ratings included:
- Consolidated Annual Financial Statements June 2020 (Plus four years of comparative audited numbers);
- Monthly reporting to May 2021
- Auditor General report for FY2020
- Debt facility breakdown at June 2021;
- The Integrated Development Plan 2020/2021;
- Schedule A accounts.