Johannesburg, 20 December 2017 — 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 is a category C municipality whose primary role is the provision of bulk water services to the five underlying local municipalities and large private consumers located along its pipelines, as well as the rollout of bulk water reticulation infrastructure. In addition, WCDM maintains roads within the district on an agency basis for the provincial government. Thus, the bulk of capex undertaken by the district is for the underlying municipalities or the national/provincial government, but this is done on an agency basis and its expenditure obligation is limited to the amount of funding it receives. WCDM reports little capex for own accounts, with spend of less than R10m per annum projected over the medium term.
Grant income and own revenue were largely flat in FY17, although lower agency fees resulted in a 5% decrease in total income to R343m. Nevertheless, the District has reported generally strong growth in revenue over the review period, supported by a 40% increase in grants and agency fees between FY13 and FY17 and a 30% rise in own revenue. The proportion of own revenue has thus remained between 30-35% of total income, reducing the reliance on government grants. Expenditure has also risen over the review period, albeit with a relatively volatile trajectory, which has allowed for strong surpluses to be reported in most years. Combined with low capex, this has underpinned robust operating liquidity and high cash reserves. WCDM’s debtors book is very small and exhibits a high collection rate as it does not have a direct relationship with household customers.
WCDM has not raised additional debt since FY13, with existing debt amortised to R57m at FY17 (FY16: R73m). This saw gross debt to income decrease to 17% at FY17 (FY16: 20%). Furthermore, strong cash reserves have sustained the District’s net ungeared balance sheet over the review period. Cash on hand has remained above 220 days over the review period, and registered a high 264 days at FY17 (excluding unspent conditional grants). Interest cover improved to 31x (FY16: 23x) further reflecting the strong liquidity.
Although the serious drought conditions in the Western Cape persist, this has not yet been reflected in the District’s revenue and cash generation. Nevertheless, there is evidence of decreased usage, which would impact water revenue. Management does not expect this to materialise to a significant extent as the district is working on a number of water treatment plans, including desalinisation, which will enable it to maintain an uninterrupted supply to residents.
| NATIONAL SCALE RATINGS HISTORY | ||
| Initial rating (December 2007) | ||
| Long term: A-(ZA); Short term: A1-(ZA) | ||
| Outlook: Stable | ||
| Last rating (December 2016) | ||
| Long term: A-(ZA); Short term: A1-(ZA) | ||
| Outlook: Stable |
ANALYTICAL CONTACTS
| Primary Analyst | ||
| Eyal Shevel | ||
| Sector Head: Corporate and Public Sector Ratings | ||
| (011) 784-1771 | ||
| shevel@globalratings.net | ||
| Committee Chairperson | ||
| Sheri Few | ||
| Senior Analyst | ||
| (011) 784-1771 | ||
| few@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2017
WCDM rating reports, 2007-2016
RATING LIMITATIONS AND DISCLAIMERS
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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. |
| 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 with no contestation of the rating.
The information received from West Coast District Municipality and other reliable third parties to accord the credit ratings included;
- Pre-audit financial statements for the year ended 30 June 2017
- Four years of audited historical financial statements
- Budget reports up to 2020
- The Integrated Development Plan for 2017/2018
- 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.
