Johannesburg, 25 April 2017 — Global Credit Ratings has today affirmed the national scale ratings assigned to King Cetshwayo District Municipality* of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to King Cetshwayo District Municipality (“KCDM”) based on the following key criteria:
As a district municipality, KCDM is inherently reliant on government funding to perform its mandated operating and capex activities, with over 90% of its revenue derived from this source. This dependence on government is positive in that grant funding is always committed three years into the future as per medium-term budgets, while it also largely mitigates the dependence on debtors’ performance. Note is, however, taken of increasing fiscal strain which could affect government funding over the long term, particularly in terms of capital grants.
KCDM’s mandate entails the provision of water services to the five municipalities in the district, as well as the rollout of infrastructure and the provision of free services to indigents, which comprise a high proportion of the population. While capex has been increased in recent years, there is a massive development backlog and government funding will be required over the long term. In addition, drought conditions are currently affecting water supply and agriculture in the district, increasing the costs associated with water service provision.
KCDM has evidenced income growth over the review period, driven by higher grants, and reflecting the success of the district in implementing projects in line with national government’s objectives. As the compound annual growth rate (“CAGR”) in income of 18.3% since FY11 has outstripped that of expenses (14.8%), KCDM has reported large surpluses. However, gross consumer debtors rose to R65.6m in FY16 (FY15: R56.5m), while, after accounting for the higher provision, net consumer debtors were higher at R24m (FY15: R20.9m). Including a large grant debtor owed by the National government, as well as VAT receivables, total debtors were substantial at of R152m and R160m at FY15 and FY16 respectively. Nevertheless, the Division of Revenue Act required payments of these amounts the following year.
KCDM has not raised new debt since FY10 and thus gross debt had amortised to R68m at FY16, its lowest level since FY09. With the concomitant increases in reserves, solvency has improved, with total debt to total income decreasing to just 7% in FY16 (FY15: 10%). Liquidity is considered strong, with days cash on hand of 224 days at FY16, excluding unspent conditional grants (FY15: 248 days).
Development of internally generated revenue sources by KCDM would serve to diversify the earnings base and reduce dependence upon government, and bode positively from a credit risk perspective. Conversely, a material reduction in the levels of government funding would have dire consequences for KCDM, rendering it unable to meet its service delivery commitments. Furthermore, should this latter occurrence or other factors precipitate significant increases in debt financing; this would have a negative bearing on the district’s credit risk profile.
* uThungulu District municipality was renamed King Cetshwayo District Municipality effective from 1 July 2016.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2006)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Last rating (April 2016)|
|Long term: A(ZA); Short term: A1(ZA)|
|Head: Corporate ratings and public sector debt|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2017
UDM rating reports, 2006-2016
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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 Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|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.|
|Debt Financing||Raising capital by selling debt instruments such as bonds, bills or notes.|
|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.|
|Mandate||Authorisation or instruction to proceed with an undertaking or to take a course of action. A borrower, for example, might instruct the lead manager of a bond issue to proceed on the terms agreed.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|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.|
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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
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 credit rating/s has been disclosed to King Cetshwayo District Municipality with no contestation of the rating.
The information received from King Cetshwayo District Municipality and other reliable third parties to accord the credit rating(s) included;
- Audited financial results of King Cetshwayo District Municipality 2015/2016 (Plus four years of comparative numbers);
- Budget reports up to 2018;
- The Integrated Development Plan;
- Most recent schedule A and C schedule accounts; and
- Industry comparative data.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR affirms King Cetshwayo District Municipality’s* rating of A(ZA); Outlook Stable.