Johannesburg, 20 December 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to West Coast District Municipality at 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 (“GCR”) has accorded the above credit ratings to West Coast District Municipality (“WCDM”) based on the following key criteria:
WCDM has a fairly diverse economy, comprising manufacturing, agriculture, agri-tourism and raw material. The District’s current core operations are limited to the provision of water infrastructure and supply of bulk water to the underlying local municipalities and c.950 direct clients. However, the current management team foresees the District playing a more active role in driving integration and economic development in the district. Key to this is developing infrastructure to ensure water security.
The District has a long standing record of clean audit reports and low irregular expenditure, demonstrating the strong financial management. The underlying municipalities are also generally well performing.
WCDM’s income is underpinned by the provision of water and road maintenance undertaken on behalf of the Provincial Government. This has lessened reliance on government grants, which have only increased moderately. Successfully implementing some of the development plans should help the District to diversify its income sources, albeit the positive effects will only materialise over the medium term.
The reduction in water consumption as a result of the drought related usage restrictions reduced water revenue, which negatively saw overall income decrease 4% in FY18. This coincided with a steep 16% growth in expenditure, resulting in the first operating deficit over the review period. This was reflected in much weaker cash generation, which impacted the District’s ability to timeously pay suppliers. Staff costs have remained a significant cost driver for the District and account for 51% of total expenditure, well above GCR’s benchmark of 35%.
WCDM strong liquidity profile has been supported by strong operating cash flows and few capex requirements, resulting in rising cash reserves over the review period. As such, cash coverage has remained robust at 272 days at FY18 (FY17: 271 days). The strong liquidity is further reflected by the gross interest cover of 21x (FY17: 32x). Some pressure on cash resources could arise upon the unwinding of creditor balances and if large projects materialise, but WCDM has sufficient resources to meet these requirements.
WCDM has not raised debt since FY13 and the existing interest bearing debt has been reduced from over R100m at FY14 to R40m at FY18 (FY17: R57m). The strong cash reserves have sustained the net ungeared position reported over the review period and the gross debt to income ratio declined to 12% at FY18 (FY17: 17%). While the District will likely require debt funding to implement its development plans, there are no plans to raise debt in the short term.
Upward rating movement is dependent on the successful implementation of proposed projects that will facilitate stronger income growth and diversify internally generated revenue. Conversely, an increase in debt could likely see gearing levels rise above historical levels which could negatively impact the ratings. The rating could also be downgraded should the curtailment of grant funding lead to a decline in income, requiring the higher utilisation of cash resources.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2007)||Last rating (December 2017)|
|Long term: A-(ZA); Short term: A1-(ZA)||Long term: A-(ZA); Short term: A1-(ZA)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Eyal Shevel||Danisile Munyai|
|Sector Head: Corporate and Public Sector Ratings||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2018
WCDM rating reports, 2007-2017
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.|
|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.|
|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.|
|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.|
|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.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings 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 ratings 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 ratings have been disclosed to West Coast District Municipality.
The information received from West Coast District Municipality and other reliable third parties to accord the credit ratings included:
- Audited financial statements for the year ended 30 June 2018
- Four years of audited historical financial statements
- Budget reports up to 2021
- The Integrated Development Plan for 2018/2019
- Most recent schedule C schedule accounts
- Most recent statement of comparison of budget and actual information
- 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 West Coast District Municipality’s rating of A-(ZA); Outlook Stable.