Johannesburg, 19 June 2019 – GCR Ratings (“GCR”) has 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 a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|King Cetshwayo District Municipality||Issuer Long Term||National||A(ZA)||Stable Outlook|
|Issuer Short Term||National||A1(ZA)||–|
The ratings on King Cetshwayo District Municipality (“KCDM”) reflects the relative strengths of the South Africa municipal sector score, combined with the entity’s very low gearing and strong liquidity, which offsets the inherent weakness in KCDM’s entity profile.
KCDM’s credit rating is underpinned by its strong financial profile. In this regard, the district reports a very low level of debt (R44.5m at FY18), which continues to be amortised. Accordingly, net debt to income has averaged just 5% over the review period, while operating cash flow coverage of been high. Even accounting for a proposed R40m increase in debt during FY20 to fund capex, credit protection metrics remain very strong. The financial profile is further supported by KCDM’s robust liquidity, underpinned by R498m in cash on hand at FY18 (FY17:R503m). Although this translated into slightly lower days cash on hand 240 days (FY17: 298 days), cash coverage remains high.
Offsetting the financial strengths is the inherent weakness in KCDM’s entity profile. 80% of the residents in the district live in rural areas, with unemployment reaching 50%. Given the very low income levels, most residents are entitled to receive the majority of their water requirements for free. Accordingly, while KCDM’s primary responsibility is to develop and maintain the water infrastructure in the district, it can only generate low amounts of service income. Thus, the district is entirely dependent on the National Government for grant funding.
Positively, growth in grant income demonstrates the National Government’s commitment to funding KCDM, while the district has also demonstrated good competencies in implementing projects and extending the water network. Nevertheless, there remain substantial infrastructure backlogs in the district.
The Stable Outlook reflects GCR’s expectation that KCDM will continue to implement its capital project pipeline efficiently, while maintaining a strong financial profile.
Positive rating action is unlikely as it would depend on a material improvement in the financial position of the district and its residents. Alternatively, a change in mandate that allows KCDM to broaden its scope of operations and successfully diversify income sources could also support a higher business profile score.
Negative rating action could arise if KCDM’s financial position were to deteriorate significantly due to a material increase in debt or a large decrease in cash holdings. The rating may also be negatively impacted if the ‘Qualified’ audit opinion persists.
|Primary analyst||Eyal Shevel||Sector head: Corporate and Public Sector|
|Johannesburg, ZA||shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Mathew Pirnie||Sector head: Financial Institutions|
|Johannesburg, ZA||mathewp@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 Country Risk Scores, June 2019|
King Cetshwayo District municipality
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||A-(ZA)||Stable||Dec. 2006|
|Issuer Short Term||Initial||National||A1-(ZA)||–||Dec. 2006|
RISK SCORE SUMMARY
|Country risk score||15.00|
|Management and governance||0.00|
|Leverage and Capital Structure||2.00|
|Government support floor||0.00|
|Capital||The sum of money that is used to generate proceeds.|
|Cash Flow||A financial term for monetary changes in operations, investing and financing activities.|
|Credit||A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company|
|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.|
|Debt||An obligation to repay a sum of money.|
|Income||Money received, especially on a regular basis, for work or through investments.|
|Liquidity||The ability to repay short-term obligations or short-term availability of liquid assets to a market or entity.|
SALIENT POINTS 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.
The credit rating has been disclosed to King Cetshwayo District Municipality. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
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 rating included:
- Audited financial results of King Cetshwayo District Municipality 2017/2018 (Plus four years of comparative numbers);
- Budget reports up to 2020/2021;
- The Integrated Development Plan 2018/2019;
- Schedule A accounts to December 2018; and