Johannesburg, 24 May 2013 — Global Credit Ratings has today affirmed the long term national scale and affirmed the short term national scale issuer ratings assigned to West Coast District Municipality of A-(ZA) and A1-(ZA) respectively; with the outlook accorded as Stable.
RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) on West Coast District Municipality based on the following key criteria:
WCDM’s primary operation is the distribution of water to its five local municipalities (Bergrivier, Cederberg, Matzikama, Saldanha Bay and Swartland) and several hundred surrounding farmers. This service is viewed as relatively simple given the small customer base and the absence of a direct relationship with households. Further comfort is derived from the experienced management team.
The district has evidenced a steadily deteriorating net operating position over the review period, which culminated in a R31m deficit in F12 (F11: R1m deficit). This was on the back of a once-off charge of R34m related to the disestablishment of the District Management Area (“DMA”) in F11. Following the 2011 local government elections, the Municipal Demarcation Board decided to reintegrate the DMA into the closest local municipality geographically, with the transfer being effective as of 1 July 2011. The district, thus, remains heavily reliant on government funding for its operational and capex requirements. This is cause for some concern in light of subdued government revenue due to the weak economic environment.
With regards to debtors, WCDM boasts a high collection rate of about 97% given its small customer base and the fact it predominantly supplies other municipalities, thus the debtors book is largely current. Liquidity metrics remain sound with cash days on hand at 174 days at FYE12 (FYE11: 218 days) and cash coverage of total debt at 1.5x (FYE11: 1.5x).
In light of its limited income generating capacity, the district resorted to debt to mostly fund the maintenance and upgrade of water infrastructure, which has come under increasing pressure due to a lack of investment. As such, debt has risen by R88m over the review period reaching a high of R98m at FYE11 and then subsiding to R91m at FYE12. AS WCDM plans no additional borrowing beyond F13, this will see gross gearing remain low at 42% and 48% at FYE13 and FYE14 respectively, albeit close to the 50% cap recommended by National Treasury.
A positive rating action would be dependent on the growth of internally generated revenue coupled with more efficient distribution of water services to the local municipalities and farmers. However, the rating would come under pressure if National Treasury’s austerity bias translates to lower grant allocations for WCDM, which would adversely hamper the district’s operations.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Dec/2007)
Long term: A-(ZA); Short term: A1-(ZA)
Outlook: Stable
Last rating (May/2012)
Long term: A-(ZA); Short term: A1-(ZA)
Outlook: Stable
ANALYTICAL CONTACTS
Primary Analyst
Atusaye Mughogho
Analyst
+27 11 784 1771
mughogho@globalratings.net
Committee Chairperson
Eyal Shevel
Sector Head: Corporates
+27 11 784 1771
shevel@globalratings.net
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Global Master Criteria For Rating Public Entities
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.
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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 be ingrated; 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 face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of info 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 included the latest audited annual financial statements (plus four years of comparative numbers), budget reports, the Integrated Development Plan, most recent year to date accounts and other publicly available documentation as required by the Municipal Finance Management Act No. 56 of 2003.
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