Announcements Corporate Public Entities Rating Alerts

GCR updates four local government’s issuer ratings following a deterioration in South Africa’s operating environment

Rating Action

Johannesburg, 17 August 2020 – GCR Ratings (“GCR”) has reviewed public ratings on four South African local and regional government entities (“LRGs”) following the deterioration of South Africa’s operating environment.

The LRGs listed below were included in this review, with the following rating actions taken:

  • Nkangala District Municipality: The international scale long term issuer rating downgraded to B+ from BB-, with the outlook accorded as Stable. At the same time, the national scale long term and short term issuer ratings affirmed at A(ZA) and A1(ZA) respectively, with a Stable Outlook.
  • eThekwini Municipality: The national scale long term and short term issuer ratings affirmed at AA+(ZA) and A1+(ZA) respectively, with a Stable Outlook.
  • Buffalo City Metropolitan Municipality: The national scale long term and short term issuer ratings affirmed at A(ZA) and A1(ZA) respectively, with a Stable Outlook.
  • West Coast District Municipality: The national scale long term and short-term issuer ratings affirmed at A(ZA) and A1(ZA) respectively, with a Stable Outlook.

Rated Entity

Rating class

Rating scale

Rating

Outlook / Watch

eThekwini Municipality

Long Term Issuer

National

AA+(ZA)

Stable Outlook

Short Term Issuer

National

A1+(ZA)

Buffalo City Metropolitan Municipality

Long Term Issuer

National

A(ZA)

Stable Outlook

Short Term Issuer

National

A1(ZA)

Nkangala District Municipality

Long Term Issuer

International

B+

Stable Outlook

Long Term Issuer

National

A(ZA)

Stable Outlook

Short Term Issuer

National

A1(ZA)

West Coast District Municipality

Long Term Issuer

National

A(ZA)

Stable Outlook

Short Term Issuer

National

A1(ZA)

The issuer rating action follows a reduction in the operating environment assessment applicable to local and regional governments. Specifically, GCR lowered the Country Risk Score for South Africa by -0.5 to 7.00, in a Country Risk Score market alert released on the 27th of May 2020. Details of updates to GCR’s Country and Sector Risk Scores are outlined in the respective reports, available via the following link: https://gcrratings.com/risk-scores/.

Rating Rationale

GCR reduced South Africa’s Country Risk Score to reflect expectations of the adverse impact of COVID-19 related disruptions on economic productivity, as well as our view of the effectiveness of interventions to stabilise the economy. While the lowering of the operating environment scores has not translated to downgrades of the national scale ratings, the international scale issuer rating assigned to Nkangala District Municipality has been lowered to B+, Stable Outlook, from BB-, Stable Outlook previously, due to the reduced country risk profile of South Africa. GCR will carry out full rating reviews on all the aforementioned LRG entities by December 2020.

Outlook Statement

The Stable Outlook reflects our expectations that, notwithstanding the heightened uncertainty in the wake of the COVID-19 crisis, and the recessionary environment, the respective LRGs have ample liquidity sources to maintain their respective financial profiles.

Rating Triggers

While deemed unlikely over the outlook period, the district municipalities could achieve upward rating movement if the national fiscal position strengthens sufficiently to prioritise sizeable grant support for large infrastructure projects. Conversely, negative rating action could arise from sustained large decreases in grant income. Similarly, if expenditure increases or the scope of responsibilities is expanded without a corresponding rise in income, the resultant net deficits could see the strong cash positions deteriorate.

Positive rating action for the metropolitan issuers could emanate from a sustained rebound in collections beyond the COVID crisis that further reinforces liquidity. Conversely, negative rating action could arise from protracted COVID related disruptions that result in lower collections than anticipated and increase the costs of service delivery without commensurate compensation from tariff movements, or from unmitigated deterioration in supply chain management or other governance factors. This would likely lead to rising debt funding and weaker credit protection metrics.

Analytical Contacts

Primary analyst

Patricia Zvarayi

Deputy Sector Head: Corporate Ratings

Johannesburg, ZA

patricia@GCRratings.com

+27 11 784 1771

     

Committee chair

Vinay Nagar

Senior Analyst, Financial Institution Ratings

Johannesburg, ZA

Vinay@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’s Country Risk Score report, published May 2020

GCR Rating Scales Symbols and Definitions, May 2019

Ratings history

Rated entity

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

eThekwini Municipality

National

Initial

Long Term Issuer

AA-(ZA)

Stable Outlook

Oct 2001

National

Short Term Issuer

A1(ZA)

National

Last

Long Term Issuer

AA+(ZA)

Stable Outlook

Nov 2019

National

Short Term Issuer

A1+(ZA)

Buffalo City Metropolitan Municipality

National

Initial

Long Term Issuer

BBB(ZA)

Stable Outlook

Aug 2003

National

Short Term Issuer

A3(ZA)

National

Last

Long Term Issuer

A(ZA)

Stable Outlook

Nov 2019

National

Short Term Issuer

A1(ZA)

Nkangala District Municipality

International

Initial

Long Term Issuer

BB-

Negative Outlook

Nov 2017

National

Long Term Issuer

A(ZA)

Stable Outlook

Nov 2017

National

Short Term Issuer

A1(ZA)

International

Last

Long Term Issuer

BB-

Stable Outlook

Nov 2019

National

Long Term Issuer

A(ZA)

Stable Outlook

Nov 2019

National

Short Term Issuer

A1(ZA)

West Coast District Municipality

National

Initial

Long Term Issuer

A-(ZA)

Stable Outlook

Dec 2007

National

Short Term Issuer

A1-(ZA)

National

Last

Long Term Issuer

A(ZA)

Stable Outlook

Dec 2019

National

Short Term Issuer

A1(ZA)

Risk Score Summary

Factors & sub-factors

eThekwini Municipality

Buffalo City Metropolitan Municipality

West Coast District Municipality

Nkangala District Municipality

       

Operating environment

14.00

14.00

14.00

14.00

Country & sector risk score*

14.00

14.00

14.00

14.00

         

Business profile

2.00

(2.50)

(4.50)

(5.00)

LRG Profile

1.50

(0.50)

(3.00)

(3.00)

Operating performance

1.00

(1.00)

(1.50)

(2.00)

Management & governance

(0.50)

(1.00)

         

Financial profile

1.00

2.00

4.00

4.00

Leverage

1.00

2.00

2.00

2.00

Liquidity

2.00

2.00

         

Comparative profile

Government support

Peer analysis

         

Total score

17.00

13.50

13.50

13.00

*The country risk score serves as a proxy for sector risk.

Glossary

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.

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.

Maturity

The length of time between the issue of a bond or other security and the date on which it becomes payable in full.

Portfolio

A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

Short Term Rating

See GCR Rating Scales, Symbols and Definitions.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings process was 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 the rated entities. The ratings above were solicited by, or on behalf of, the rated entities, and therefore, GCR has been compensated for the provision of the ratings.

The rated entities participated in the rating process via management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered to be adequate, and has been independently verified where possible. The information received from the rated entities and other reliable third parties to accord the credit ratings included:

  • The latest audited financial results (plus four years of comparative numbers)
  • Budget reports
  • The latest Integrated Development Plans

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