Johannesburg, 08 June 2016: Global Credit Ratings has today affirmed the national scale long term debt rating for Kampala Capital City Authority at A(UG), whilst the national scale short term debt rating has been affirmed at A1-(UG). Outlook has been accorded as Stable. The review is an interim review and accordingly the ratings are valid until 30 October 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Kampala Capital City Authority (“KCCA”) based on the following key criteria:
Kampala is the financial centre of Uganda, accounting for approximately 80% of industrial and commercial activity and contributing 65% to GDP. Thus, the city is considered critical to the country’s prosperity, implying strong government support. Government support has also been demonstrated through the establishment of KCCA and the assignment of a minister to represent the city in the Cabinet. This implied and demonstrated support is an important supporting factor in respect of the ratings. However, the Auditor General highlighted the large outstanding Government debtors as a key concern that needs to be addressed for KCCA to strengthen its financial position and liquidity.
KCCA continues to update its property register, licence taxis and other businesses, and expand its rates and fees base. This has seen internal revenue more than double from UGX40bn in F12 to UGX85bn in F15, and at 3Q F16 was on track to register a similar level for the full year. The improved operational performance has also engendered greater confidence from the Government of Uganda and international development agencies. Crucially, this has translated into additional funding for KCCA, with transfers from the government rising 20% to UGX140bn in F15, while grants from external parties more than doubled to UGX79bn (F14: UGX37bn).
Tight cost management (with cost increases well below income) resulted in large surpluses of UGX55bn and UGX65bn in F15 and 3Q F16 respectively. The staff cost ratio also fell within the 35% benchmark that GCR considers prudent in both periods.
KCCA currently has no debt and this is unlikely to change until legislation that caps debt funding at 10% of internal revenue is eased. KCCA is engaging the Government to ease this limitation so that it can tap the commercial debt market in the medium term. However, KCCA maintains only negligible cash balances and relies on the National Treasury to honour its obligations. This exposes KCCA to the financial health of the National Government, even if funding has been allocated to the city.
Positive rating action is dependent on sustained growth in internal revenue, allowing KCCA to become more self-sustainable. The demonstrated ability to bring large infrastructure projects to fruition would also be positively considered. Conversely, a reversal of the operational progress made at the municipality, potentially evidenced by rising expenditure on staff and consumption could lead to a ratings downgrade. Lack of progress in addressing the social and infrastructural needs of the city may also hamper financial performance.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/ Last (May 2015)|
|Long term: A(UG)|
|Short term: A1-(UG)|
|Rating outlook: Stable|
|Sector Head: Corporate and Public Sector Ratings|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2016
KCCA rating report 2015
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S “SECTOR” GLOSSARY
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|LC||An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations.|
|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||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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|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.|
RATING LIMITATIONS AND DISCLAIMERS
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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.
Kampala Capital City Authority participated in the rating process by providing the necessary rating information. GCR is satisfied that the information available was sufficient.
The credit ratings have been disclosed to Kampala Capital City Authority.
The information received from Kampala Capital City Authority and other reliable third parties to accord the credit rating(s) included:
- Abridged financial results for year to 30 June 2015
- Auditor General’s report for F15 results
- Audited financial results for the four years to 30 June 2014
- Management accounts for 9 months to 31 March 2016
The ratings above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the ratings.
GCR affirms Kampala Capital City Authority’s rating at A(UG); Outlook Stable