Johannesburg, 18 May 2021 – GCR Ratings (“GCR”) has affirmed the national scale Issuer ratings assigned to King Cetshwayo District Municipality at 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)|
The ratings on King Cetshwayo District Municipality (“KCDM” or the District) balance the inherent weakness in KCDM’s entity profile and limited ability to grow internally generated income, against the District’s low debt utilization and strong cash balances.
KCDM’s strong financial profile is considered a key credit strength. With capex largely met through capital grants, debt has been low, with a net ungeared balance sheet maintained to date. With only R32m of debt at FY20, gross debt to total income registered at 3% (FY19:4.5%). Similarly, debt serviceability ratios remain very strong, on the back of continued conservative funding policies, although funding concentration is noted. Moreover, the District’s strong liquidity profile is supported by ample cash on balance sheet, with days cash on hand averaging at least 200 days over the review period.
Constraining KCDM’s credit profile is the inherent weakness in its demographics. While the district benefits from the inclusion of the industrial town of Richards Bay, around 80% of the residents in the District live in rural areas with unemployment levels notably higher than the national average. As a result of high poverty levels of c.70%, the majority of the population is dependent on government social grants and 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, whilst there remains large infrastructure backlog in respect of its core mandate to develop and maintain water infrastructure in the District.
The District reflects a high reliance on fiscal support (91% of total income), as its internally generated revenue is largely limited to the sale of water, where income progression thereof has been low in view of the population characteristics. Thus, while the dependence on grant funding exposes the District to the weak fiscal position of the National Government, GCR considers the importance of providing water and thus expects government support to continue. To this end, KCDM has reflected relatively consistent levels of grant funding in the R800m-R900m range annually. COVID-19 has not had material financial impact on the District, apart from a slight uptick in debtors and some delays in project rollouts, with the lower water consumption observed during hard lockdown compensated for by higher annual tariffs. This, combined with well-managed expenditure growth, has seen KCDM continue to report fairly sound operating surpluses.
The municipality has resumed with unqualified audit opinions for FY19 and FY20, which suggests an ongoing improvement in financial management. Fruitless and irregular expenditure has generally been negligible, although the Auditor General did express some concern as to the increase in the latter in the most recent financial year, as well as the markedly higher water loss ratio reported, thus indicating the need for improvements of maintenance and replacement capex for water and sanitation.
KCDM’s ratings are at the upper limit for South African District municipalities, with further progression unlikely unless there is a fundamental change in the District’s operating structure. Conversely, negative rating action could arise should the District evidence a marked reduction in government support or should net deficits result which could see the strong cash position deteriorate or gearing increase markedly.
|Primary analyst||Sheri Morgan||Senior Analyst: Corporate & Public Sector Ratings|
|Johannesburg, ZA||morgan@GCRratings.com||+27 11 784 1771|
|Committee chair||Corne Els||Senior Analyst: Financial Institution Ratings|
|Johannesburg, ZA||cornee@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 Country Risk Scores, March 2021|
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 2020|
|Short term Issuer||Last||National||A1(ZA)|
RISK SCORE SUMMARY
|Rating components & factors||Risk scores|
|Country & sector risk score*||14.00|
|Management and governance||0.00|
|Leverage and capital structure||2.00|
|Government support floor||0.00|
|Total Risk Score||13.00|
*The country risk score serves as a proxy for sector risk.
|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.|
|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.|
|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.|
|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 2019/2020 (Plus four years of comparative numbers);
- Budget reports up to 2021/2022;
- The Integrated Development Plan 2020/2021-2021/2022;
- Schedule A accounts