Johannesburg, 24 Oct 2016 — Global Credit Ratings has today upgraded the national scale long term rating assigned to eThekwini Metropolitan Municipality to AA(ZA), while the short term rating has been maintained at A1+(ZA); with the outlook accorded as Positive.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to eThekwini Metropolitan Municipality (“eThekwini”) based on the following key criteria:
eThekwini is one of eight metropolitan municipalities in South Africa, encompassing the economic centre of Durban. The metro has consistently reported better socio economic statistics than South Africa as a whole, with stronger economic growth and a decrease in unemployment during 2015, as a result of a diverse economic base and the benefits of the large port. Economic performance should be further strengthened through the implementation of the catalytic projects, several of which are already underway.
eThekwini achieved a clean audit in F15 and expects another clean audit for F16. Where emphasis of matters was drawn by the Auditor General, these relate to regular operating issues affecting all municipalities and most irregular spend has been condoned.
The metro has reported stable income growth over the review period, mostly above the inflation rate. While in the past this was driven by steep escalations to electricity tariffs, more recently income has been supported by rising grants, reflecting the success of the metro in implementing projects in line with its and the national government’s objectives, which in turn has attracted additional funding. Expenses continue to be well contained and have risen at a slower rate than income, due to successful efficiency initiatives and expense management. Maintenance has been sustained at adequate levels, whilst staff costs are below GCR’s benchmark. This has led to rising surpluses over the review period.
Financial results have been supported by the strong performance of the consumer debtors book, with collections above 100% of current debtors in F15 and F16. In addition, the metro has now provided for 95% of debtors outstanding more than 90 days, substantially mitigating the risk related to consumer debtors, and further large impairments are considered unlikely. Where the metro has experienced rising debtors is with respect to projects carried out on behalf of the Department of Human Settlements. Payment is subject to budget being available and as eThekwini continues to construct social housing on its own account, associated outstanding debtors are likely to remain high.
Gross debt has remained stable over the review period, with gearing metrics at moderate levels. Following the decrease in debt and higher cash at FYE16, net debt to income fell to just 9.7% (FYE15: 18.8%). Funding is further supported by the large discretionary cash balance of R6.1bn (FYE15: R4.8bn). Thus, total days cash on hand improved to 103 days at FYE16 (FYE15: 96 days), while discretionary days cash on hand rose by a greater amount to 92 days (FYE15: 77 days).
A further upgrade would be dependent on the continued strong growth in major invoice items, as well as the maintenance of strong cash flows by sustaining high debtor’s collection metrics. Bringing large projects to fruition, and realising the positive impact on municipal income, would support income growth. Conversely, a weakening economy that leads to a marked deterioration in debtor’s performance would negatively impact cash flows and could lead to higher gearing metrics. Lower income, rising indigent costs or a reduction in government grants could also increase funding pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2001)|
|Long term: AA-(ZA); Short term: A1(ZA)|
|Last rating (October 2015)|
|Long term: AA-(ZA); Short term: A1+(ZA)|
|Sector Head: Corporate and Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2016
eThekwini rating reports, 2001–2015
RATING LIMITATIONS AND DISCLAIMERS
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|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing 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.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating Was 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.
eThekwini 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 credit rating/s has been disclosed to eThekwini Metropolitan Municipality with no contestation of the rating.
The information received from eThekwini Metropolitan Municipality and other reliable third parties to accord the credit ratings included:
- Unaudited financial results of eThekwini for 2015/2016;
- Industry comparative data;
- The 2015/2016 IDP;
- The 2016/2017 – 2018/2019 medium term budgets;
- The AG report on the municipality for 2014/2015;
- Section 52/schedule C reports for eThekwini; and
- Statutory documentation for the category A municipalities.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR upgrades eThekwini Metropolitan Municipality’s rating to AA(ZA); Outlook Positive