Johannesburg, 19 Nov 2018 – Global Credit Ratings has today affirmed Nkangala District Municipality’s national scale issuer ratings of A(ZA) and A1(ZA) in the long term and short term respectively, with the outlook accorded as Stable. Furthermore, Global Credit Ratings has accorded Nkangala District Municipality an international scale issuer rating of BB-, with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings Nkangala District Municipality (“NDM” or “the District”) based on the following key criteria:
NDM’s economy is underpinned by coal mining and primary industries, which have been significantly impacted by the lower GDP growth, resulting in higher unemployment. Nevertheless, NDM has generally reported an improvement in socio-economic conditions. Further development of its agricultural sector is now being prioritised to bolster economic activity and job creation.
NDM’s mandate is to coordinate infrastructure development across the six municipalities which form the district, and provide some capacity support. Its role has become increasingly important in light of the weak financial management in the underlying municipalities. Thus, government support can be considered high.
NDM has a long track record of unqualified audit reports and the same is expected in FY18, demonstrating the strong financial management.
Grants from National Government (97% of income) provide a recurring and reliable income stream. Nevertheless, the District’s lack of financial independence is a ratings constraint, as has become more evident due to the low growth in grant allocation, which has not kept up with cost inflation (particularly rising staff costs). Historically, administrative costs accounted for around 30% of total expenditure, while 70% was invested in projects. However, since FY15 the balance has shifted and, particularly due to rising staff costs over which the district has little control, administrative expenditure now exceeds grant expenditure. This trends bodes negatively for the sustainability of the District municipality model.
The increased spend on projects, following improved project management practices, is positively viewed as this is NDM’s core function. Nevertheless, the higher spend was funded from cash reserves in FY18 and (somewhat perversely) the more NDM fulfils its mandate to drive development, the greater its cash needs will be. If this funding is not forthcoming from government, then it will lead to a deterioration in liquidity metrics, albeit this will be a long-term process.
Notwithstanding that cash and investments declined to R431m at FY18 (FY17: R458m), it remains relatively high. Similarly, cash coverage was lower at 402 days (FY17: 471 days), but remains very strong. The very robust cash position, which is expected to be sustained, continues to underpin NDM’s current ratings. Gross gearing is negligible and is expected to be fully settled in FY20.
NDM’s ratings are at the upper limit for District municipalities and thus further progression is unlikely unless there is a major change in the operating structure of District municipalities. Conversely, a reduction in government support, either through lower grant funding or in terms of perceived operational support would negatively impact the ratings. The rating could also be downgraded if the current trend of rapid expenditure growth and slow income persists, resulting in an erosion of NDM’s liquidity profile. The international scale rating is directly linked to the South African sovereign rating, and any movement in the sovereign rating would likely have an impact on NDM’s international scale rating.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (October 2017)|
|Long-term: A(ZA), Short-term: A1(ZA)|
|INTERNATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (October 2017)|
|Sector Head: Corporate and Public Sector Ratings|
|Senior Analyst: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2018
GCR International Scale Local Currency to National Scale Mapping Table – South Africa, updated June 2018
Nkangala District Municipality rating report, 2017
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATES GLOSSARY
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|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.|
|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.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|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 ratings process was 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; c.) such ratings were 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.
Nkangala District Municipality participated in the rating process via face-to-face management meetings and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Nkangala District Municipality.
The information received Nkangala District Municipality and other reliable third parties to accord the credit ratings included:
- Pre-audit financial statements for the year ended 30 June 2018 (Plus four years of comparative audited numbers);
- Budget reports up to 2021;
- The Integrated Development Plan for 2018/2019;
- 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 Nkangala District Municipality at rating of A(ZA), Outlook Stable.