Announcements Corporate Rating Alerts

GCR affirms eThekwini Municipality’s National Scale Issuer Ratings of AA+(ZA)/A1+(ZA), and places them on Positive Outlook due to the Expected Earnings Improvement Post COVID-19

Rating Action

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)

Rating Rationale

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.

Outlook Statement

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.

Rating Triggers

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.

Analytical Contacts

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

Ratings History

eThekwini Municipality

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
Operating environment 14.00
Country & sector risk score* 14.00
Business profile 2.50
LRG Profile 1.50
Operating performance 1.00
Management & governance 0.00
Financial profile 1.00
Leverage and capital structure 1.00
Liquidity 0.00
Comparative profile 0.00
Government support floor 0.00
Peer analysis 0.00
Total score 17.50

*The country risk score serves as a proxy for sector risk.

Glossary

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.
image_pdf


ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2021 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.