Announcements

GCR affirms the Municipal Council of Mbabane’s rating at BBB+(SW); Outlook Stable.

Johannesburg, 30 July 2014 – Global Credit Ratings has today affirmed the national scale ratings assigned to the Municipal Council of Mbabane of BBB+(sw) in the long term and A2(sw) in the short term; with the outlook maintained as Stable. The rating(s) are valid until July 2015.

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 capital of Swaziland, housing most of central government, and is thus a key hub of the country’s economic activity. The municipality thus has a pivotal role to play in social and economic development. However, the ratings accorded to it are constrained by its limited sources of income, with assessment rates accounting for around 85% of income over the review period. Moreover, around half of rates income is generated from government departments, exposing Mbabane to the erratic government payment patterns.

Notwithstanding efforts to restructure operations to ensure financial sustainability, at 44%, the ratio of staff expenses to total expenses is above GCR’s benchmark of 35% and the municipality’s target of 40%. Moreover, over 85% of expenditure can be classified as consumptive, with little income remaining for maintenance and infrastructure development projects. Mbabane is considering various means to diversify its sources of income, as well as to expand the private sector portion of rates income. However, the weak economic environment constrains the private sector and limits the rate increases that can be implemented.

In line with government directives, Mbabane’s higher capex in F14 was self-funded (as opposed to by government grants), with gross debt more than doubling to E15m at FYE14. Nevertheless, gross debt to income remained moderate at 17.1%, while the municipality remains in a strong net cash position. Despite a large working capital absorption due to delayed rate payments by government, Mbabane maintained its high cash balance at E67.8m. This translated to slightly lower days cash cover of 339 days at FYE14 (FYE13: 398 days), albeit still very high. Nonetheless, Mbabane has identified E500m in projects necessary to address the infrastructure backlog. However, given internal constraints and the government’s limited financial capacity to support projects, the municipality is reliant upon the receipt of external grant funding.

Mbabane’s ratings are constrained by the small size of the municipality and the limited scope of its operational activities. An upgrade would thus only likely occur over the medium to long term, and would be predicated on improved economic conditions in Swaziland, as well as growth in the municipality’s rates base. However, failure to secure adequate external support to undertake projects could result in further infrastructure deterioration and thus a rating downgrade. If funded internally, a large rise in gearing and depletion of cash reserves could be expected, which may also be negatively considered.

NATIONAL SCALE RATINGS HISTORY

Initial rating (May/2000)
Long term: A(SW); Short term: A1(SW)
Outlook: Stable

Last rating (August/2013)
Long term: BBB+(SW); Short term: A2(SW)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
Shevel@globalratings.net

Secondary Analyst
Richard Hoffman
Senior Analyst
(011) 784-1771
hoffman@globalratings.net

Committee Chairperson
Marc Chadwick
Sector Head: Insurance Ratings
(011) 784-1771
Chadwick@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for rating Public Entities, updated April 2014 Municipal Council of Mbabane (“Mbabane”) rating reports (2000 – 2013)

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/RATING-SCALES-DEFINITIONS. 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.

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.

Municipal Council of Mbabane participated in the rating process via 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 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 included the 2014 audited annual financial statements (plus four years of comparative numbers), the 2013/2014 Integrated Development Plan, corporate governance and enterprise risk framework, capital management policy, industry comparative data, regulatory framework and a breakdown of facilities available (including related counterparties). In addition, information specific to the rated entity and/or industry was also received.

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

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.

GCR affirms the Municipal Council of Mbabane’s rating at BBB+(SW); Outlook Stable.

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