Johannesburg, 9 July 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to the Municipal Council of Mbabane of BBB+(SZ) and A2(SZ) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until July 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to the Municipal Council of Mbabane (“Mbabane”) based on the following key criteria:
Mbabane is the administrative capital of Swaziland and houses most of the country’s central government. As such, the jurisdiction is the country’s most important social and economic centre. However, and despite this importance, the Swazi Government’s small budget and limited sources of income have constrained the support it has been able to provide to the municipality. Moreover, the municipality reports limited sources of internal revenue, which was relatively unchanged at E88.5m in F15. This revenue largely derives from rates income (87% in F15), general services (9%) and operating grants (4%). In terms of expenditure, much of Mbabane’s income is expended on salaries and wages, which accounted for 45% of the E92m operating spend reported in F15; being well above GCR’s 30% benchmark for the municipal sector. Resultantly, the council reports low financial flexibility, as well as limited ability to undertake capex from internal cash flows. Although Mbabane reported much increased capital grants of E18m in F15 (F14: E5m), capex reduced from E21m in F14 to E14m in F15. This was attributed to the receipt of World Bank grant funding in December 2014, which had not been materially spent by FYE15.
Mbabane reports a strongly solvent and net ungeared balance sheet. In this regard, equity of E539m was reported at FYE15, as compared to interest bearing debt of less than E10m and cash holdings of almost E102m. As such, the council reports low credit risk, with gross debt to total income of just 11% at FYE15 (FYE14: 17%) and operating cash flow covering gross interest by 24x. Improved payment patterns by central government saw a E23m working capital release reported in F15. This saw the gross debtors book fall to E15m at FYE15 (FYE14: E38m) and the net book to E6m (FYE14: E29m). Together with grant funding for infrastructure development that was received from the World Bank in December 2014, this drove a higher cash balance. Accordingly, liquidity was strong at FYE15, with cash on hand rising to 458 days and cash covering total debt by 10.5x (FYE14: 4.5x).
The Swazi economy remains highly dependent on the economy of South Africa, and accordingly, is witnessing the same low growth and high unemployment as South Africa. As such, Mbabane reports limited scope to grow internally generated revenues, without which its massive capex backlog (of around E500m) cannot be redressed. Further to this, Mbabane’s ratings are constrained by its small size and the limited scope of its operations. An upgrade is thus only likely to occur over the medium-long term, and would be predicated on an improved domestic economy, as well as growth of Mbabane’s rates base. Conversely, Mbabane reports massive unfunded capex. As such, failure to secure adequate external support to undertake projects could result in further infrastructure deterioration. Furthermore, if such unfunded capex were to be internally funded, this would see a large rise in gearing and a deterioration in credit risk.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (May 2000)|
|Long term: A(SZ); Short term: A1(SZ)|
|Last rating (July 2014)|
|Long term: BBB+(SZ); Short term: A2(SZ)|
|Sector Head: Corporate and Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2015
Mbabane Rating Reports, 2000-2015
RATING LIMITATIONS AND DISCLAIMERS
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|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.|
|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 Rating Agency||An entity that provides credit rating services.|
|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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|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.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|REPO||In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Solvent||The state of a company where its assets exceed its liabilities and it is able to service its debt and meet its other obligations, especially in the long-term.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
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.
Municipal Council of Mbabane 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 Municipal Council of Mbabane with no contestation of the rating.
The information received from Municipal Council of Mbabane and other reliable third parties to accord the credit rating(s) included:
- Draft/Pre-audit financial statements for the year ended 31 March 2015, as well as four years of audited financial statements;
- Mbabane Integrated Development Plan, 2014-2019;
- Mbabane Annual Operating Plan, 2015/2016 Annual Operating Plan;
- Mbabane Capital Improvement Programme, 2015/2016- 2018/2019; and
- Municipal Council of Mbabane, Annual Operating Plan 2014/2015.
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.