Johannesburg, 09 July 2021 – GCR Ratings (“GCR”) has downgraded City of Tshwane Metropolitan Municipality national scale long and short term Issuer ratings to CC(ZA) and C(ZA) respectively. The outlook is Negative.
|Rated Entity / Issuer||Rating class||Rating scale||Rating||Outlook / Watch|
|City of Tshwane Metropolitan Municipality||Long Term Issuer||National||CC(ZA)||Negative Outlook|
|Short Term Issuer||National||C(ZA)|
The downgrade to the City of Tshwane Metropolitan Municipality (“Tshwane” or “the metro”) reflects the substantial unfunded liabilities faced by the city, following large unexpected cash outflows and the reluctance of funders to provide new facilities.
Tshwane’s financial performance was severely impacted by a number of factors through FY21. Debtors’ collection fell to around 60% in the wake of COVID-19 pandemic and have not recovered sufficiently in subsequent months, placing significant downward pressure on cash flows. Thereafter, the Metro incurred R1.6bn in backdated staff costs that had not be budgeted for in order to resolve a municipal strike. As a result, the Metro is likely to have reported a second consecutive operating deficit in FY21 and cash flows are expected to remain under pressure due to the much higher staff costs going forward.
As a result of the deterioration in the financial profile, in April 2021, lenders did not participate in a request for R1.5bn in new facilities from the Metro. Tshwane had intended to utilize the funds to replenish around R1.1bn of internal resources that had been spent on various capex projects through the year. This left the Metro with much reduced cash holdings of R226m at FY21, against a net payment deficit of R1.5bn.
The severe deterioration in the financial position has led to covenant breaches and the possibility that funders will accelerate loan repayments, which GCR does not believe Tshwane could meet.
The Negative Outlook reflects the possibility that Tshwane could be called to accelerate the repayment of long-term loans, which would likely lead to a default or distressed restructuring of debt. Moreover, as GCR’s view is that the constrained cash flow position is likely to persist through FY22, compounded by potential political disruptions because of local government elections, there is little chance Tshwane could strengthen its financial position without external assistance.
A downgrade to D(ZA) or SD(ZA) will occur if Tshwane fails to meet any debt service obligations or lenders are compelled to participate in a distressed debt restructuring. The rating could be downgraded to a C(ZA) if there is no progress on resolving the financial position and the timeframe to default shortens or certainty rises.
Positive rating action could emanate from the receipt of meaningful financial support from external parties that significantly eases the debt burden. Over the medium term an improvement in revenue collection, that allows the Metro to comfortably service financial liabilities and trade creditors and thereby regain financial sustainability, could also lead to an upgrade.
|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||n.a|
|Management and governance||n.a|
|Leverage and capital structure||n.a|
|Government support floor||n.a|
|Total Risk Score||n.a|
|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