Johannesburg, 6 December 2016 — 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 ratings 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 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. Further to this, 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.
The district has reported erratic surpluses over the review period. Following a R35m deficit in F12, a small R1m surplus was reported in F13, while a review high of R46m was reported in F14. F15 and F16 saw surpluses reduce to R39m and R15m respectively. Excluding capital grants, WCDM would have reported losses in each period under review. Further to this, the municipality has reported a net ungeared balance sheet in each year under review, with the net cash position rising to R155m at FYE16. WCDM has not raised new debt since F13 and thus gross debt has continued to trend downwards, registering at R73m at FYE16 (FYE15: R88m). Similarly, income growth has seen total debt to total income decrease to 20% at FYE16 (FYE15: 28%).
Strong liquidity has been maintained over the review period, with WCDM reporting days cash on hand of 228 days at FYE16, excluding unspent conditional grants (FYE15: 251 days), while gross interest cover was 22.3x (F15: 21.2x). The district exhibits a very small debtors’ book supported by a high collection rate. This is because WCDM has no direct relationship with household consumers (only municipalities and farmers). Net capex has been markedly lower in recent periods, and amounted to R7m in F16 (F15: R16m), compared to a review period high of R36m in F13. Budgeted capex is expected to decrease going forward as effective 1 July 2016, WCDM will no longer manage capex for the underlying municipalities.
Drought conditions are currently affecting water supply and agriculture in the district, increasing the costs associated with water service provision. Thus, water restrictions are in place for all municipal areas as most dams are below 55%. It is estimated that R59m in financial support is required for disaster drought relief for West Coast and the neighbouring Central Karoo District. This is to ensure food security for residents and animals as well as to ensure farms remain sustainable.
Notwithstanding its sound financial position, WCDM’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 2007)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Last rating (September 2015)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2016
WCDM rating reports, 2007-2015
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|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.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|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||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Mandate||Authorisation or instruction to proceed with an undertaking or to take a course of action. A borrower, for example, might instruct the lead manager of a bond issue to proceed on the terms agreed.|
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 Company 2015/2016;
- Industry comparative data;
- The 2015/2016 IDP;
- The 2015/2016 – 2017/2018 medium term budgets;
- The AG report on municipality for 2014/2015; 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.
GCR affirms West Coast District Municipality’s rating of A-(ZA); Outlook Stable.