Announcements Corporate Rating Alerts

GCR affirms King Cetshwayo District Municipality’s A(ZA)balancing restrained fiscal position of the sovereign with low leverage and good liquidity. Outlook Stable

Rating Action

Johannesburg, 03 June 2020 – GCR Ratings (“GCR”) has affirmed the national scale Issuer ratings assigned to King Cetshwayo District Municipality to A(ZA) and A1(ZA) for the long and short term respectively, with a Stable Outlook.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

King Cetshwayo District Municipality

Long Term Issuer

National

A(ZA)

Stable Outlook

Short Term Issuer

National

A1(ZA)

Rating Rationale

The ratings on King Cetshwayo District Municipality (“KCDM” or the district) balance the inherent weakness in KCDM’s entity profile and the greater financial straining the public sector, against the district’s large net cash position.

KCDM’s credit rating continues to be anchored by its strong financial profile. This in turn is a factor of its robust liquidity, supported by R496m in cash on hand at FY19 (FY18: R498m). Due to higher unspent grants of R92m, available cash was somewhat lower than in FY18, but cash coverage was still very high at 188 days in FY19 (FY18: 240 days). Further supporting the strong financial position is the low gross debt balance of just R38.5m at FY19 (FY18: R44.5m), which continues to be amortised as per schedule. Consequently, gross debt to income has averaged just 5% over the review period, while operating cash flow coverage of debt has been very high. Even after factoring in the potential for R35m in new debt during FY21 to fund a waste rehabilitation site, KCDM’s credit protection metrics remain very strong.

Constraining KCDM’s credit profile is the inherent weakness in its demographics. Around 80% of the residents in the district live in rural areas with unemployment reaching 50%, higher than the national average. As a result of very low-income levels, most residents are entitled to receive the majority of their water requirements for free. Despite GCR noting some economic diversification, the district’s overall contribution to the national GDP remains negligible.

While KCDM continues to deliver on its core mandate is to develop and maintain the water infrastructure in the district, the district can practically only generate low amounts of service income. Accordingly, it remains almost entirely dependent on the National Government for grant funding, which significantly limits its operational and financial flexibility. This over-reliance on grant funding exposes the district to weak fiscal position of the National Government, as a result of which grant funding has decreased since FY16. GCR considers the possibility of a larger reduction in grant funding during FY21 to be elevated, due to the sever negative impact of COVID-19 on the National Fiscus. The pandemic may also worsen poverty levels in the district, which would increase the burden of service delivery. Notwithstanding this, KCDM has sufficient resources to manage operating deficits over the medium term, and given the importance of providing water, GCR expects government support to continue

Outlook Statement

The Stable Outlook reflects GCR’s expectation that KCDM will continue to reflect a strong net cash position, notwithstanding concerns that the reduced fiscal strength of the government and weaker economic growth could affect the operating performance of the district in the next 12months.

Rating Triggers

A positive rating action is unlikely given KCDM’s weak demographics and income levels. Negative rating action could arise if there is a meaningful decrease in grant income. Similarly, if expenditure increase or KCDM’s scope of responsibilities is expanded without a corresponding rise in income, net deficits may result which could see the strong cash position deteriorate.

Analytical Contacts

Primary analyst

Eyal Shevel

Sector Head: Corporate Ratings

Johannesburg, ZA

shevel@GCRratings.com

+27 11 784 1771

     

Secondary analyst

Alan Mananga

Associate Analyst

Johannesburg, ZA

alanm@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

Criteria for Rating Local and Regional Governments, June 2019

GCR Rating Scales, Symbols and Definitions, May 2019

GCR Country Risk Scores, May 2020

Ratings History

King Cetshwayo District Municipality

Rating class

Review

Rating scale

Rating class

Outlook

Date

Long Term Issuer

Initial

National

A-(ZA)

Stable

Dec 2006

Short Term Issuer

Initial

National

A1-(ZA)

Long Term Issuer

Last

National

A(ZA)

Stable

June 2019

Short term Issuer

Last

National

A1(ZA)

RISK SCORE SUMMARY

Risk score

King Cetshwayo District Municipality

 

 

Operating environment

14.00

Double country risk score

14.00

Adjustments

0.00

 

 

Business profile

(4.50)

LRG Profile

(3.00)

Operating Performance

(1.50)

Management and governance

0.00

 

 

Financial profile

3.50

Leverage and capital structure

2.00

Liquidity

1.50

 

 

Comparative profile

0.00

Group support

0.00

Government support floor

0.00

   

Total Risk Score

13.00

 

Glossary

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Cash

Funds that can be readily spent or used to meet current obligations.

Conditions

Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.

Covenant

A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.

Coverage

The scope of the protection provided under a contract of insurance.

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.

Diversification

Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.

Exposure

Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks

Income

Money received, especially on a regular basis, for work or through investments.

Interest Cover

Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.

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.

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.

Market

An assessment of the property value, with the value being compared to similar properties in the area.

Offset

A right (Right of Offset) to set liabilities against assets in any dispute over claims.

Operating Cash Flow

A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Reserve

(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.

Reserves

A portion of funds allocated for an eventuality.

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.

Short Term

Current; ordinarily less than one year.

Upgrade

The rating has been raised on its specific scale

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings were 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 King Cetshwayo District Municipality. 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.

King Cetshwayo District 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 information received from King Cetshwayo District Municipality and other reliable third parties to accord the credit ratings included:

  • Audited financial results of King Cetshwayo District Municipality 2018/2019 (Plus four years of comparative numbers);
  • Budget reports up to 2021/2022;
  • The Integrated Development Plan 2019/2020;
  • Schedule A accounts to December 2019
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