Johannesburg, 28 April 2016 — Global Credit Ratings has today affirmed the national scale ratings assigned to uThungulu District Municipality of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to uThungulu District Municipality (“UDM”) based on the following key criteria:
UDM’s mandate mostly relates to the provision of water and sanitation services, as well as the rollout of associated infrastructure. As a district municipality, UDM is inherently reliant on government funding to perform its mandated operating and capex activities, with over 90% of its revenue derived from this source. This dependence on government is positive in that grant funding is always committed three years into the future as per medium-term budgets, while it also largely mitigates the dependence on debtors’ performance.
UDM has reported large surpluses and operating cash flows over the five year review period, while its capex has mostly been grant funded. This has driven strong debt serviceability, growing cash balances and a net ungeared balance sheet. UDM has not raised new debt since F10. Gross debt has thus continued to trend downwards, registering at R78m at FYE15 (FYE14: R85m). Similarly, strong income growth has seen total debt to total income decrease to 10% at FYE15 (FYE14: 12%). Liquidity is considered strong, with UDM reporting days cash on hand of 250 days at FYE15, excluding unspent conditional grants (FYE14: 371 days). Cash holdings covered outstanding debt by a high 5.5x at FYE15 (FYE14: 6.1x), while gross interest cover was 18.9x (F14: 24.1x).
Note is taken of the sluggish conditions prevailing in the broad macro-economy, and the impact on businesses and households. This could see a rise in indigence in the district, as well as increased debtor delinquencies. The constrained fiscus is also noted, and if sustained, this could impact future levels of grant funding to municipalities like UDM.
Notwithstanding its sound financial position, UDM’s dependence on government funding constrains the ratings accorded. As such, growth of internally generated revenue sources would be required for positive ratings action to occur. Conversely, a curtailment of grant funding would likely lead to an erosion of the cash reserves and increased debt funding, which could potentially negatively impact the ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2006)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Last rating (April 2015)|
|Long term: A(ZA); Short term: A1(ZA)|
|Head: Corporate ratings and public sector debt|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2016
UDM rating reports, 2006-2015
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.|
|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.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|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.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
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.
UThungulu District Municipality 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 uThungulu District Municipality with no contestation of the rating.
The information received from uThungulu District Municipality and other reliable third parties to accord the credit rating(s) included;
- Audited financial results of uThungulu District Municipality 2014/2015 (Plus four years of comparative numbers);
- Budget reports up to 2018;
- The Integrated Development Plan;
- Most recent schedule C accounts; and
- Industry comparative data.
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 uThungulu District Municipality’s rating of A(ZA); Outlook Stable.