Johannesburg, 21 Dec 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to The Msunduzi Municipality of BBB+(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
As the one year tender agreement with GCR has been concluded, the ratings accorded to The Msunduzi Municipality have subsequently been withdrawn.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to The Msunduzi Municipality based on the following key criteria:
Msunduzi encompasses one of the country’s largest secondary cities in Pietermaritzburg, which reports a sizeable population and economic base, and is strategically important as it is the closest major secondary city to the Durban Port.
Msunduzi was placed under provincial administration in 2H F10 due to financial difficulties, which resulted in a large deficit reported for F10, as well as constrained operating and capital expenditure between F10 and F12. The municipality has now returned to a sound financial position, with the KwaZulu-Natal Province and the State demonstrating strong ongoing support over the review period. This also saw the introduction of more stringent policies, procedures and controls, with corporate governance and accountability at the municipality deemed to be much improved since this time.
Despite the aforesaid challenges, Msunduzi has reported strong revenue and earnings growth over the review period, underpinned by its trading services activities. Thus, following a R231m deficit in F10, the municipality has largely been able to balance its expenditure with income, with small surpluses reported in each of the subsequent five years.
Msunduzi reported a large R1.2bn cash inflow from operations in F15 (F14: R535m), underpinned by a large working capital release from the sale of land for R693m. This facilitated the higher capex and investment spend of R1.2bn in F15. Debt was reported at R597m at FYE15 (FYE14: R540m), from a peak of R624m at FYE12. The municipality has three main funders, namely; DBSA, RMB and INCA. Even excluding around R108m relating to unspent conditional grants, the municipality has reported moderate net gearing over the review period and a net ungeared balance sheet at FYE15. Gross gearing amounted to an unchanged 15% at FYE15
The municipality reports a low quality debtors book, characterised by weak payment patterns and a long dated ageing profile. The collection period has risen from 49 days in F10 to 119 days in F15.This has been exacerbated by the sharp rises in electricity and water tariffs over the review period, and is being compounded by the weak state of the domestic economy (with high unemployment and other structural deficiencies eroding consumer health across the nation).
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2001)|
|Long term: BBB(ZA); Short term: A3(ZA)|
|Last rating (December 2014)|
|Long term: BBB+(ZA); Short term: A2(ZA)|
|Primary Analyst||Secondary Analyst|
|Eyal Shevel||Farai Mauchaza|
|Sector Head: Corporate ratings||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2015.
The Msunduzi Municipality rating reports (2001 – 2012 and 2014).
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Capital Expenditure||Expenditure on long-term assets such as plant, equipment or land, which will form the productive assets of a company.|
|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.|
|Liquidity Risk||The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.|
|Working Capital||Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.|
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.
The Msunduzi Municipality did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.
The credit rating/s has not been disclosed to The Msunduzi Municipality.
The information received from The Msunduzi Municipality and other reliable third parties to accord the credit rating(s) included;
- Unaudited financial results of Msunduzi 2014/2015 and four comparatives;
- The 2015/2016 – 2017/2018 medium term budgets;
- Corporate governance and enterprise risk framework;
- Industry comparative data.
The ratings above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the ratings.
GCR affirms The Msunduzi Municipality’s rating of BBB+(ZA); Outlook Stable.