Announcements

GCR assigns the Msunduzi Municipality a rating of BBB+(ZA); Outlook Stable

Johannesburg, 17 Dec 2014 — Global Credit Ratings has today assigned national scale ratings to the Msunduzi Municipality of BBB+(ZA) and A2(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 rating(s) to the Msunduzi Municipality (“Msunduzi”) based on the following key criteria:

Following financial difficulties, Msunduzi was placed under provincial administration in 2H F10. This saw a large deficit reported for F10, as well as constrained operating and capital expenditure between F10 and F12. The municipality has now returned to a sound financial position, with the KwaZulu-Natal Province and the State demonstrating strong ongoing support over the review period. This also saw the introduction of more stringent policies, procedures and controls, with corporate governance and accountability at the municipality deemed to be much improved since this time.

Msunduzi encompasses one of the country’s largest secondary cities in Pietermaritzburg, which reports a sizeable population and economic base, and is strategically important as it is the closest major secondary city to the Durban Port. As such, and despite the aforesaid challenges, Msunduzi has reported strong revenue and earnings growth over the review period, underpinned by its trading services activities. Thus, following a R231m deficit in F10, the municipality has reported surpluses in each of the subsequent 4 years. This has seen debt serviceability improve, with gross and net interest cover reported at record levels of 2.3x and 6.5x respectively in F14 (F13: 2x and 3.9x).

Msunduzi has reported positive net cash flows over the 5-year review period, which have enabled it to maintain low levels of debt and to accrue material cash balances. This has seen the municipality report moderate net gearing over the review period and a net ungeared balance sheet at FYE14. Moreover, gross gearing amounted to a low 15% at FYE14 (FYE13: 18%), and is expected to reduce further over the three-year period to FYE17. Rising cash balances have also underpinned improving liquidity, with Msunduzi reporting more than two months cash on hand at FYE14.

Notwithstanding the positive improvements in its financial risk profile, the municipality reports a low quality debtors book, characterised by weak payment patterns and a longdated ageing profile. This has been exacerbated by the sharp rises in electricity and water tariffs over the review period, and is being compounded by the weak state of the domestic economy (with high unemployment and other structural deficiencies eroding consumer health across the nation). While efforts are being made to improve collections, the gross debtors book continues to rise and remains the major constraint to the municipality’s ability to deliver on its capex projects and increase its service delivery levels.

Looking ahead, an upward movement in Msunduzi’s ratings would be predicated on an improvement in the quality of its debtors book, both in terms of the cash flow profile and the adequacy of provisioning. In contrast, the ratings could come under pressure from a reduction in government grants or increased uncertainty regarding future such receipts. Deteriorating debtor collection rates, impacting operating cash flows, could impact credit risk metrics, which in turn would bode negatively for the ratings.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Sep/2001)

Long term: BBB(ZA); Short term: A3(ZA)

Outlook: Stable

Last rating (March/2012)*

Long term: BBB(ZA); Short term: A3(ZA)

Outlook: Positive

* GCR’s mandate to rate Msunduzi was cancelled in 2013, and as a result the ratings were withdrawn in 2013. In 2014, GCR’s mandate was reinstated.

ANALYTICAL CONTACTS

Primary Analyst

Richard Hoffman

Analyst

(011) 784-1771

hoffman@globalratings.net

Committee Chairperson

Eyal Shevel

Head: Corporate & Public Sector Debt Ratings

(011) 784-1771

shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Public Entities, updated April 2014

Msunduzi rating reports, 2001-2012

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS REPORT

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.
Capital Expenditure Expenditure on long-term assets such as plant, equipment or land, which will form the productive assets of a company.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
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 Risk The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.
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.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.

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.

The Msunduzi 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 credit rating/s has been disclosed to the Msunduzi Municipality with no contestation of the rating.

The information received from the Msunduzi Municipality and other reliable third parties to accord the credit rating included the 2014 pre-audit annual financial statements (plus four years of comparative numbers), 2014/2015-2016/2017 budget reports, the Integrated Development Plan and other publicly available documentation as required by the Municipal Finance Management Act No. 56 of 2003.

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 assigns the Msunduzi Municipality a rating of BBB+(ZA); Outlook Stable

image_pdfPDF View

Leave a Reply



ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2021 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.