Johannesburg, 14 May 2014 — 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.
Global Credit Ratings has accorded the above credit rating(s) to uThungulu District Municipality (“UDM”) based on the following key criteria:
UDM, as a district municipality, is inherently reliant on government funding to perform its mandated operating and capex activities, with over 90% of its revenue derived from grants. This dependence on government is positive in that grant funding is always committed three years into the future per medium-term budgets, while it also largely mitigates the dependence on debtors’ performance. UDM’s mandate entails the provision of water services to 5 of the 6 municipalities in the district, including the rollout of infrastructure and the provision of free services to indigents. With a large backlog of capex and an entrenched indigent population, government is expected to continue to support UDM indefinitely.
UDM has reported robust operating surpluses and cash flows over the past decade, as well as mostly externally-funded capex. This has resulted in strong debt serviceability (with UDM a net interest receiver), large cash balances and a net ungeared balance sheet. In this regard, UDM reported R635m in cash at 1H F14, as compared to outstanding gross debt of just R88m. Gross debt to total income has continued to trend downwards and amounted to just 7% at 1H F14 (FYE13: 14%), and no plans currently exist to raise further debt. Gross interest cover has also risen, from 6.5x in F11 to 12.8x in F13 (F12: 17.9x), while liquidity is considered ample, with sufficient cash on hand to cover operating expenditure for more than a year. Moreover, at 1H F14, cash holdings covered outstanding debt by a very high 7.2x (FYE13: 5x).
Note is taken of the sluggish conditions prevailing in the broad macro-economy, and the impact on businesses and households in the Richard’s Bay area. This could see a rise in indigence in the UDM district, as well as increased debtor delinquency. The constrained finances of the central government are also noted, with it reporting rising budget deficits and growing indebtedness. If sustained, this could impact future grant funding to municipalities like UDM.
Notwithstanding its sound financial position, UDM’s dependence on government funding constrains the ratings accorded to it. As such, the development and diversification of its internally generated revenue sources and reduced dependence upon government would be required for future upward ratings movements. Conversely, a material reduction in government financial support could have negative ratings implications if not accompanied by a much reduced mandate and/or significant new revenue sources.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Dec/2006)
Long term: A-(ZA); Short term: A1-(ZA);
Last rating (May/2013)
Long term: A(ZA); Short term: A1(ZA);
Sector Head: Corporate & Public Sector Debt Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria For Rating Public Entities, updated April 2014
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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 included the 2012/2013 audited annual financial statements (plus four years of comparative numbers), budget reports, the Integrated Development Plan, most recent Schedule C accounts, 1H 2014 unaudited interim accounts and other publicly available documentation as required by the Municipal Finance Management Act No. 56 of 2003.
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.