Announcements

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

Johannesburg, 1 August 2016 – 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 2017.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Municipal Council of Mbabane based on the following key criteria:

Mbabane is the capital of Swaziland, housing most of the central government, and is the 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 Mbabane are constrained by its limited sources of income, with assessment rates accounting for around 84% of income over the review period, with lesser income earned from general services (7% in F15) and operating grants (9% in F15). Moreover, around half of rates income is generated from government departments, exposing Mbabane to the erratic government payment patterns.

Despite continued efforts to reduce expenditure, particularly in the wake of constrained government finances, at 48% the ratio of staff expenses to total expenses is still above GCR’s benchmark of 35% and the municipality’s target of 40%. Nevertheless, the planned outsourcing of certain services is expected to reduce staff expenses and other costs over the medium term.

Mbabane reported a SZL8.8m surplus in F16, as well as strong cash flow from operations of SZL25m (F15: SZL29m). Given the sound operating cash flows, Mbabane was able to reduce debt by SZL2m in F16 (versus a SZL5m decrease in the prior year), whilst also accumulating SZL25m in cash. Accordingly, liquidity was bolstered by the 25% higher cash holdings of SZL127m at FYE16. As such, days cash on hand rose to 546 days at FYE16, having averaged more than 400 days since FYE13. However, management indicated that cash tended to be received close to year end and the bulk is spent early in the financial year.

Given its limited resources, capex spend is expected to be moderate, despite the considerable backlog. While increased capex is planned over the next two years, given the limited resources available to Mbabane, this is contingent upon the receipt of grant funding from government and the World Bank. Mbabane will continue to seek opportunities to diversify its sources of income, as well as to expand the private sector portion of rates income, but the economic environment remains restrictive for the private sector and limits the quantum of rate increases that can be implemented.

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(SZ); Short term: A1(SZ)    
Outlook: Stable    
     
Last rating (July 2015)    
Long term: BBB+(SZ); Short term: A2(SZ)    
Outlook: Stable    
     

ANALYTICAL CONTACTS

Primary Analyst    
Farai Mauchaza    
Analyst    
(011) 784-1771    
faraim@globalratings.net    
     
Committee Chairperson    
Eyal Shevel    
Sector Head: Corporate and Public Sector Ratings    
(011) 784-1771    
shevel@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2016

Criteria for Rating Public Entities, updated February 2016

Mbabane Rating Reports, 2000-2015

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 CORPORATE GLOSSARY

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
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.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
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.
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.
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.
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.

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:

  1. Draft/Pre-audit financial statements for the year ended 31 March 2016, as well as four years of audited financial statements;
  2. Mbabane Capital Improvement Programme, 2015/2016- 2018/2019; and
  3. Mbabane Integrated Development Plan, 2014-2019;

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 the Municipal Council of Mbabane’s rating of BBB+(SZ); Outlook Stable.

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