Announcements Public Sector Rating Alerts

GCR revises West Coast District Municipality’s Issuer ratings to A/A1(ZA) on criteria change. Outlook Stable.

Rating Action

Johannesburg, 20 December 2019 – GCR Ratings (“GCR”) has revised West Coast District Municipality’s National Scale Long Term and Short Term Issuer Credit ratings to A(ZA) and A1(ZA), from A-(ZA) and A1-(ZA), respectively, with a Stable Outlook affirmed.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
West Coast District Municipality Issuer Long Term National A(ZA) Stable Outlook
Issuer Short Term National A1(ZA)

GCR announced that it had released new ratings framework in May 2019. Consequently, the ratings for West Coast District Municipality were placed ‘Under Criteria Observation’. GCR finalised the review for West Coast District Municipality under the Criteria for Local and Regional Governments, released in June 2019. As a result, the West Coast District Municipality ratings have been reviewed in line with the new rating methodology and subsequently removed from ‘Under Criteria Observation’.

Summary rating rationale

West Coast District Municipality’s (“WCDM, “the District”) ratings are underpinned by its strong financial profile, supported by its net ungeared position and substantial cash holdings. Constraining the ratings somewhat is the high reliance on grant income funding.

WCDM has a fairly small population and regional economy. Nevertheless, economic activity is diverse encompassing manufacturing, agriculture and tourism industries, which continue to support the district’s GDP (Gross Domestic Product) growth above national statistics. Positively, WCDM reports a low unemployment rate of 11%, compared to the 29% national average, with socio-economic indicators broadly in line with the national average. That said, the district continues to seek ways to strengthen economic diversification and growth, but meaningful improvement will only be achieved in the longer term.

GCR considers the district operating structure in South Africa to be an inherent rating weakness. This is because WCDM continues to be significantly reliant on grant funding, which has tracked inflation since FY18 (with FY20 and FY21 indicating the same trend), albeit some internally generated revenue is positive noted. Conversely, operating costs have been increasing faster than inflation, attributable to staff costs which now account for c.47% of expenditure. Overall operating expenditure accounts for 99.4% of total annual spend, reducing resources for capital implementation. As grant funding growth is projected to remain relatively low amidst the weaker national fiscal position, this trend is likely to continue. While GCR positively notes the WCDM’s initiatives and efforts to diversify its income sources, this will only likely to materialise in the medium to long term.

Capex implementation has been well above average of 90% of budget in the review period, which is positively viewed in light of WCDM’S core mandate, as is the long track record of clean audit outcomes.

Positively contributing to the ratings is the district’s robust financial profile. WCDM continues to follow a very conservative financial policy, with debt having been amortised over the review period to a low R27m at FY19 (FY18: R40m). Notwithstanding a potential R65m in new debt to fund some projects, the district will remain in a strong net cash position. Counterbalancing the strong leverage is the limited demonstrated access to external funding, albeit management have indicated there is strong demand from the private sector to fund the proposed new debt.

The strong liquidity profile is supported by unencumbered cash holdings of R307m (FY18: R270m). Consequently, unencumbered cash coverage remained high, at 296 days in FY19 (FY18: 289 days), and comfortably covers all debt redemption and capex requirements. While a decreasing trend in unencumbered cash days on hand is projected in the medium term as more internal cash is used for project implementation, liquidity is expected to remain robust.

Outlook statement

The Stable Outlook reflects the view that WCDM’s credit risk profile will continue to be supported by the large cash balance and conservative leverage.

Rating triggers

WCDM’s ratings are at the typical upper limit for South African district municipalities, with further progression unlikely unless there is a fundamental change in the district’s operating structure. Conversely, an unexpected increase in debt could likely see gearing levels rise above historical levels which could negatively impact the ratings.

Analytical Contacts

Primary analyst Eyal Shevel Sector Head: Corporate and Public Sector
Johannesburg, ZA shevel@GCRratings.com +27 11 784 1771
Secondary analyst Alan Mananga Associate Analyst: Corporate and Public Sector
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 Country Risk Scores, June 2019

Ratings History

West Coast District Municipality

Rating class Review Rating scale Rating Outlook/Watch Date
Issuer Long Term Initial National A-(ZA) Stable Dec 2007
Issuer Short Term National A1-(ZA)
Issuer Long Term Last National A-(ZA) Stable Dec 2018
Issuer Short Term National A1-(ZA)

Risk Score Summary

Risk score 14.50
Operating environment 15.00
Country risk score 15.00
Adjustments 0.00
Business profile -4.50
LRG Profile -3.00
Operating Performance -1.50
Management and governance 0.00
Financial profile 4.00
Leverage & Capital Structure 2.00
Funding & Liquidity 2.00
Comparative profile 0.00
Government support 0.00
Peer comparison 0.00

Glossary

Capital Markets The part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term debt securities.
Country Risk The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.
Credit Rating See GCR Rating Scales, Symbols and Definitions.
Downgrade The rating has been lowered on its specific scale.
DMTN Domestic Medium Term Notes.
Issuer Ratings See GCR Rating Scales, Symbols and Definitions.
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.
Operating Cash Flow An entity’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 Horizon The rating outlook period, typically a period of 18-24 months.
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 Current; ordinarily less than one year.
Upgrade The rating has been raised on its specific scale.
Working Capital Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the rating 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; c.) such ratings were 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 credit ratings have been disclosed to West Coast District 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.

West Coast District 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 West Coast District Municipality and other reliable third parties to accord the credit ratings included:

  • The unaudited financial results up to 30 June 2019
  • Four years of comparative audited numbers
  • Budget reports to the 2021/22 fiscal year
  • The Integrated Development Plan, 2019/20 review
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