Johannesburg, 30 September 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to West Coast 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 West Coast District Municipality (“WCDM”) based on the following key criteria:
WCDM is a category C municipality whose main activity entails the rollout of bulk water reticulation infrastructure, as well as the provision of bulk water services, to the five local municipalities located within the West Coast district and to large private consumers located along its pipelines. In addition, WCDM maintains roads within the district on an agency basis for the provincial government. As such, the district reports a limited mandate, with little exposure to consumer debtors and unfunded mandates. Accordingly, WCDM reports limited internally generated revenue (relating to bulk water mostly), and is highly reliant on grant funding from central government to perform its operating mandate.
WCDM has reported surpluses and positive operating cash inflows in most years over the review period, which have driven strong debt serviceability and growing cash balances. The municipality reported a net surplus of R34m in F15 (F14: R46m), sharply contrasting the R35m deficit reported in F12. As such, a cumulative net surplus of R44m has been reported over the review period, raising equity to R460m at FYE15. Further to this, the municipality has reported a net ungeared balance sheet in each year under review, with the net cash position rising to R111m at FYE15 (FYE14: R68m). Moreover, no new debt has been raised since F13, with gross debt falling to R88m at FYE15. Accordingly, gross debt to total income reduced to a review period low of 28% at FYE15 (FYE14: 35%). Liquidity metrics have also been sound over the review period, with cash on hand rising to 246 days at FYE15 and cash coverage of total debt to 2.7x (FYE14: 1.6x).
WCDM reports a very small debtors’ book, supported by a high collection rate and underpinned by the strong counterparties that the municipality supplies (being category B municipalities and bulk consumers). However, drought conditions are currently affecting water supply and agricultural conditions in the district, increasing the costs associated with water service provision.
Notwithstanding its sound financial position, WCDM’s dependence on government funding constrains the ratings accorded. Accordingly, future rating uplift would be dependent on growth and diversification of internally generated revenues. In contrast, given WCDM’s reliance on government, a curtailment of grant funding would be negatively considered and this could lead to an erosion of its cash reserves, increased debt utilisation and a deterioration of credit protection metrics.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2007)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Last rating (September 2014)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Primary Analyst||Secondary Analyst|
|Richard Hoffman||Farai Mauchaza|
|Senior Analyst||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2015
WCDM rating reports, 2007-2014
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.|
|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.|
|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.|
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.
West Coast District Municipality 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 to West Coast District Municipality with no contestation of the rating.
The information received from West Coast District Municipality and other reliable third parties to accord the credit rating(s) included;
- Unaudited financial results of WCDM 2014/2015;
- Industry comparative data;
- The 2014/2015 IDP;
- The 2015/2016 – 2017/2018 medium term budgets;
- The AG report on municipality for 2013/2014; and
- Statutory documentation for the category B municipalities located within the district.
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.