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)
Last rating (March/2012)*
Long term: BBB(ZA); Short term: A3(ZA)
* 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.
Head: Corporate & Public Sector Debt Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated April 2014
Msunduzi rating reports, 2001-2012
RATING LIMITATIONS AND DISCLAIMERS
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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