Johannesburg, 29 July 2020 – GCR Ratings (“GCR”) has downgraded the national scale long term Issuer rating assigned to City of Johannesburg Metropolitan Municipality to AA-(ZA), while affirming the national scale short term issuer rating of A1+(ZA) short term. The outlook is Stable.
|Rated Entity / Issuer||Rating class||Rating scale||Rating||Outlook / Watch|
|City of Johannesburg Metropolitan Municipality||Long Term Issuer||National||AA-(ZA)||Stable Outlook|
|Short Term Issuer||National||A1+(ZA)|
The ratings downgrade on City of Johannesburg Metropolitan Municipality (“CoJ” or “the metro”) reflects the weaker operating environment, which is expected to affect the metro’s operating performance. This is counterbalanced by the metro’s improved liquidity position.
CoJ’s operating performance has been stable and is considered rating neutral, despite some of the persistent weaknesses. In this respect, the metro evidences well diversified sources of income, with strong underlying growth in key income sources such as rates and water, but has been constrained by increasing staff costs, a rising debtors book over the review period and service delivery backlogs.
GCR expects the COVID-19 disruptions to compound these problems. The metro under-collected on its revenue by 20% in April and 13% in May 2020 due to hard country-wide lockdown, and has budgeted for an additional R884m debtors provision for FY20. More significantly, GCR expects revenue collection challenges to persist through FY21 as residents and commercial property owners face affordability constraints in meeting their obligations. A return to normalised collection levels is only anticipated once there is renewed economic growth. With less cash available, service delivery levels and the rate of infrastructure development are likely to suffer. The CoJ has already reduced its capital expenditure budgets to around R7.5bn per year for the FY21 to FY23 period, which will mitigate the need for additional funding support, but will detract from longer term service delivery. Amidst these challenges, cost rigor will be critical to maintaining strong service levels.
CoJ’s financial position is constrained by its high debt, albeit that credit protection metrics have remained moderate due to income growth. Thus, gross debt amounted to R23.2bn at FY19 and is projected to be slightly higher at FY20. Nevertheless, due to robust revenues and operating cashflow flow growth, net debt to total income improved to 29% at FY19 (FY18: 35.8%), while operating cashflow coverage of gross debt rose to 37.1% (FY18: 23.5%). Similarly, operating cashflow coverage of interest rose to 4.2% (FY18: 2.7%). Credit protections metrics are anticipated to remain in the moderate range going forward, with net debt to total income expected to trend within 30% to 35% level. Concerns regarding the high level of debt are somewhat mitigated by the very long tenure of CoJ’s debt, with most debt facilities amortising over a 10 – 20 year period, and its demonstrated diverse funding relationships.
12-month liquidity coverage of around 1.5x is supported by a projected c.R4bn cash on hand at FY20 (excluding c.R1.8bn in the sinking fund) and c.R2bn in committed facilities, largely from Development Bank of South Africa. Against this, are debt maturities of c.R1.8bn. Improved liquidity is also evidenced by firmer cash on hand of c.68 days at FY19 (FY18: c.20 days), with the metric expected to trend within 45 to 55 days level for FY20. Although the cut backs in capital expenditure will help preserve liquidity amidst the current disruption, longer term liquidity strength is dependent on improving collection rates.
The CoJ’s very strong entity profile remains critical to its rating. The metro is the economic center of South Africa, contributing 15% to the country’s GDP. Its economic strength is anchored by its broad diversification and its position as the economic gateway to the country and continent at large. Notwithstanding this, an increasing population alongside rising unemployment and poverty levels in some areas, will continue to increase the burden of CoJ’s service delivery responsibilities and infrastructure backlogs.
The Stable Outlook reflects GCR’s expectation that, despite anticipated challenges arising from COVID related disruption and an economic contraction, the metro has sufficient strong income and adequate liquidity sources to maintain its financial profile.
Positive rating action could emanate from improved collect on revenues that strengthens the liquidity assessment or enables the metro to reduce debt somewhat. Negative rating action could arise from COVID related disruption that result in lower collections than anticipated, or increase the costs of service delivery without being compensated. This would likely lead to an increase in debt funding and weaker credit protection metrics.
|Primary analyst||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||shevel@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Alan Mananga||Associate Analyst|
|Johannesburg, ZA||alanm@GCRratings.com||+27 11 784 1771|
|Committee chair||Yohan Assous||Sector Head: Structured Finance|
|Johannesburg, ZA||yohan@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 Johannesburg Metropolitan Municipality
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||National||AA(ZA)||Stable||Oct 2018|
|Short Term Issuer||Initial||National||A1+(ZA)|
|Long Term Issuer||Last||National||AA(ZA)||Negative||July 2019|
|Short term Issuer||Last||National||A1+(ZA)|
RISK SCORE SUMMARY
|Rating Components & Factors||Risk scores|
|Double country risk score||14.00|
|Management and governance||0.00|
|Leverage and capital structure||(1.00)|
|Government support floor||0.00|
|Total Risk Score||15.00|
|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.|
|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.|
|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.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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||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 Johannesburg 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 Johannesburg 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 Johannesburg Metropolitan Municipality and other reliable third parties to accord the credit ratings included:
- Audited financial results of City of Johannesburg Metropolitan Municipality 2018/2019 (Plus four years of comparative numbers);
- Budget reports up to 2020/2023;
- The Integrated Development Plan 2019/2020;
- Schedule A accounts to December 2019
- MTB 2020-21 Final Approved Budget
- Market presentations