Announcements

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

Johannesburg, 31 July 2017 – 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 2018.

SUMMARY RATING RATIONALE

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

Mbabane is the administrative capital of Swaziland housing most of the country’s central government. Consequently, the municipality has an integral role in the country’s economic and social development. Notwithstanding its significance, the municipality receives limited support from the Swazi Government as it is faced with budget constraints and limited sources of income.

The municipality reported double digit growth in revenue for the second consecutive year, at SZL113.9m FY17 (FY16: SZL100.7m). Assessment rates income was the main driver of the hike in revenue (FY17: 79% of total income; FY16: 87%), bolstered by a once off restructuring grant. Whilst the growth is positively considered, aside from rates, Mbabane’s income generating capacity remains limited.

A restructuring grant was used to pay out former employees of the council culminating in expenditures rising by 13%. However, recurring expenditure items were well contained, with depreciation fairly stable at SZL14m, and staff costs marginally lower at SZL42m. The staff cost ratio remains slightly above the GCR benchmark of 35% of total cost (FY16: 47%) but within the municipality’s 40% target.

The gross debtors book increased to SZL27m in FY17 mainly due to unpaid assessment rates by the central government. This highlights the municipality’s income concentration risk, where the government accounts for a considerable percentage of the debtors book. As a result of government’s non-payment, the debtors book increased by SZL14.5m, which had an impact on the decline in the cash balance to SZL106m (FY16: SZL127m). Moreover, FY17 saw an increase in payments to contractors for capex projects, in contrast to the prior year as funds were only received in late December. Consequently, there was a reduction in days cash on hand to 393 days from 578 days in FY16.

Mbabane reports a strongly solvent and net ungeared balance sheet, with gross debt easing to SZL5.9m at FY17 (FY16: SZL8.2m). Positively, there was a significant increase in capex for infrastructure (FY17: SZL57m), with funding provided predominantly by the World Bank.

Mbabane’s ratings are constrained by its small size and the limited scope of its operational activities. An upgrade would only likely occur over the long term, and would be centred on the improvement in the Swaziland’s economy, as well as growth of Mbabane’s rates base. Conversely, failure to secure adequate external support to assume 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 could negatively impact the rating.

NATIONAL SCALE RATINGS HISTORY  
   
Initial rating (May 2000)  
Long term: A(SZ); Short term: A1(SZ)  
Outlook: Stable  
   
Last rating (July 2016)  
Long term: BBB+(SZ); Short term: A2(SZ)  
Outlook: Stable  

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate and Public Sector Ratings
(011) 784-1771
shevel@globalratings.net
 
Committee Chairperson
Sheri Few
Senior Analyst
(011) 784-1771
few@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Public Entities, updated February 2017

Mbabane Rating Reports, 2000-2016

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

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.
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.
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.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
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.
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.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating 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.

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 ratings have 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 ratings included:

  • Draft/Pre-audit financial statements for the year ended 31 March 2017, as well as four years of audited financial statements;
  • Mbabane Capital Improvement Programme, 2015/2016- 2018/2019; and
  • 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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