Johannesburg, 14 October 2020 – GCR Ratings (“GCR”) has assigned City of Tshwane Metropolitan Municipality national scale long and short term issuer ratings of A(ZA) and A1(ZA) respectively. The outlook is Stable.
|Rated Entity / Issuer||Rating class||Rating scale||Rating||Outlook / Watch|
|City of Tshwane Metropolitan Municipality||Long Term issuer||National||A(ZA)||Stable Outlook|
|Short Term issuer||National||A1(ZA)|
The ratings on City of Tshwane Metropolitan Municipality (“Tshwane” or “the metro”) balances its position as a key economic, political and research center in South Africa, with the fact that the metro is currently under administration, its average but deteriorating operating performance, relatively high gearing and moderate liquidity profile.
Contributing positively to the metro’s rating, is its strong LRG profile. The metro enjoys a diversified economy underpinned by its position as the capital city of South Africa and home to numerous international embassies, which make it critical to the country’s functioning. In addition, many educational research institutions are located in Tshwane, as well as manufacturing and trade concerns. As a result, Tshwane contributes around 10% of national GDP and c.25% to that of the Gauteng Province. That said, most of the metro socio-economic indicators, especially unemployment and poverty levels are largely in line with the national average. However, due to the presence of numerous higher education institutions in the metro, Tshwane evidences a higher education rate, which could provide a buffer to the rising unemployment rate over the rating horizon.
GCR has taken a negative view on management and governance, reflecting the fact that Tshwane is currently under administration due to the inability of the political wing to form a stable administration, as well as the persistent high level of irregular expenditure. The negative adjustment is, however, moderated by the limited impact this has on the day to day administration of the metro.
Operating performance is considered neutral as Tshwane’s revenue base has been stable over review period, albeit with some persistent weaknesses and expected strain over the next 12-18 months due to the weaker economic environment. Positively, the metro evidences well diversified sources of income and has historically posted good surpluses. However, the inability to contain staff costs and other contracts with third party providers, and a rising debtors book and weak collections offset this strength. Furthermore, GCR expects revenue collection challenges to persist over the medium term until meaningful economic growth returns. As a result, service delivery levels and the rate of infrastructure development are likely to suffer.
The relatively high levels of debt necessitated by weaker cash flows are also expected to constrain Tshwane’s gearing profile, Thus, while gross debt amounted to R12bn at FY20 (FY19: R12.5bn) and is projected to be slightly higher at FY21, net debt to total income is expected to be around 30% at FY20 from 41% in FY15 (FY19: 23%). Looking ahead, credit protections metrics are anticipated to slightly weaken over the medium term, with net debt to total income expected to trend within 35% to 40% level. Concerns regarding the high level of debt are somewhat mitigated by the very long tenure of Tshwane’s debt, with most debt facilities amortising over a 10 – 20-year period, and its demonstrated diverse funding relationships.
The liquidity assessment has also been moderated by lower projected cash flows due to collection challenges, and the disruptions caused by COVID-19. Cash days on hand is projected at around 37 days for FY20 and may weaken to between 30 to 35 days over the short to medium term. This just meets national treasury’s range for cash reserves of between 1 and 3 months. Nevertheless, GCR estimates the metro’s 12-month liquidity coverage to be around 1.5x, supported by R2.2bn cash on hand at FY20, a R1.3bn sinking fund for debt redemptions, and c.R1.5bn in short term facilities expected from Nedbank and ABSA during the first half of FY21. Against this are debt maturities of c.R1.7bn (including a DBSA of just under R1bn) and c.R4bn in capex spend (of which more than half will be funded by government grants). Furthermore, cognisance is taken that if cash flows fall below projections, capital expenditure will be reduced to preserve liquidity, albeit if sustained this would impact the longer-term financial position of the metro.
The Stable Outlook reflects GCR’s expectation that despite anticipated challenges arising from COVID related disruptions and an economic contraction, the metro will have adequate liquidity sources to meet its financial obligations and core service delivery requirements.
A positive rating action could emanate from 1) resolution to the problems that have resulted in the metro being placed under administration 2) improved collections that strengthens cash inflows and the liquidity assessment 3) a reduction in debt such that debt to income registers below 30% on a sustained basis.
A negative rating action could arise from 1) COVID related disruption that result in lower collections than anticipated, 2) increases to service delivery costs without adequate compensation 3) rising debt levels to make up for shortfall in service delivery and/or capital expenditure, 4) the negative impact to policy implementation and service delivery as a result of administration.
|Primary analyst||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Local and Regional Governments, June 2019|
|GCR Rating Scales, Symbols and Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
City of Tshwane Metropolitan Municipality
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial/ last||National||A(ZA)||Stable Outlook||October 2020|
|Short Term Issuer||Initial/ last||National||A1(ZA)|
RISK SCORE SUMMARY
|Rating Components & Factors||Risk scores|
|Double country risk score||14.00|
|Management and governance||(1.00)|
|Leverage and capital structure||(1.00)|
|Government support floor||0.00|
|Total Risk Score||13.50|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Income||Money received, especially on a regular basis, for work or through investments.|
|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.|
|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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Offset||A right (Right of Offset) to set liabilities against assets in any dispute over claims.|
|Operating Cash Flow||A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
|Upgrade||The rating has been raised on its specific scale|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings were 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to City of Tshwane Metropolitan Municipality. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
City of Tshwane Metropolitan Municipality participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from City of Tshwane Metropolitan Municipality and other reliable third parties to accord the credit ratings included:
- Audited financial results of City of Tshwane Metropolitan Municipality 2018/2019 (Plus four years of comparative numbers);
- Budget reports up to 2020 to 2023;
- Select debt and cash figures as at 30 June 2020;
- The Integrated Development Plan 2019/2020;
- Schedule A accounts to December 2019;
- MTB 2020-21 Final Approved Budget;
- Market presentations