Announcements Corporate Public Sector Rating Alerts

GCR downgrades City of Tshwane Metropolitan Municipality ratings to CC(ZA)/ C(ZA) due to unexpected cash crunch

Rating Action

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)

Rating Rationale

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.

Outlook Statement

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.

Rating Triggers

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.

Analytical Contacts

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

Ratings History

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
Operating environment n.a
Double country risk score n.a
Adjustments n.a
Business profile n.a
LRG Profile n.a
Operating Performance n.a
Management and governance n.a
Financial profile n.a
Leverage and capital structure n.a
Liquidity n.a
Comparative profile n.a
Group support n.a
Government support floor n.a
Total Risk Score n.a

Glossary

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
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