Johannesburg, 02 March 2018 — Global Credit Ratings has today upgraded the long term national scale Issuer ratings assigned to eThekwini Metropolitan Municipality to AA+(ZA), while the short term rating has been maintained at A1+(ZA); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
EThekwini is one of eight metropolitan municipalities in South Africa, encompassing the economic centre of Durban. The metro has a diverse economic base, comprising manufacturing, logistics and tourism, which has helped it sustain economic growth and job creation above the national performance levels. Moreover, EThekwini has demonstrated a strong capacity to deliver on projected operational and capex expenditure. To this end, social indicators are improving and several large catalytic projects are well advanced, which should support continued economic growth.
Income growth slowed to 2.9% in FY17, constrained by lower growth in services revenue and a decrease in capital grants. In contrast, expenditure increased by 11%, which reduced the net surplus to a review period low R2.2bn (FY16: R4.3bn), albeit maintaining the unbroken record of surpluses. Consumer debtors spiked to R7.4bn at FY17, as collection rates deteriorated due to the migration in billing systems. This led to a higher debtors provision and a large debt write-off, which inflated expenditure. However, with the debtors migration almost complete, the metro is confident that the collection rate will again rise above the 100% level, while the new system will provide a superior ability to manage and analyse debtors going forward.
The lower surpluses, combined with a working capital absorption, saw cash generation fall to R5.1bn (FY16: R7bn). While this was largely sufficient to cover capex, the metro utilised internal cash resources to redeem some debt, with the cash balance falling to R6.3bn (FY16: R6.9bn). This equates to 74 days cash coverage, which, although slightly below GCR’s 90 day benchmark, remains adequate for a large metro.
Gross debt decreased further to R8.8bn at FY17 (FY16: R9.2bn; FY15: R10.2bn). This saw gross and net debt decrease to 27.1% and 10.4% respectively, both review period lows, and reflective of the metro’s modestly geared position. Further strengthening eThekwini’s financial flexibility is the diverse range of banks and financial institutions with whom it has credit facilities. This includes the four major banking groups, state owned finance institutions and major international development agencies
EThekwini achieved another unqualified audit in FY17, with low levels of irregular expenditure and other items flagged, demonstrating the strong financial management ingrained throughout the municipality.
A further rating upgrade is dependent on continued robust growth in major income items, as well as the maintenance of strong cash flows by sustaining high debtors collection metrics. Bringing large projects to fruition, and realising the positive impact on municipal income, could support financial strength, as could an improvement in the general economic environment. Conversely, a weakening economy that leads to a deterioration in debtors 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 and result in a ratings downgrade.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2001)|
|Long term: AA-(ZA); Short term: A1(ZA)|
|Last rating (November 2017)|
|Long term: AA(ZA); Short term: A1+(ZA)|
|Sector Head: Corporate and Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2017
eThekwini rating reports, 2001–2017
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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.|
|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 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 are 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 ratings have 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:
- Audited financial results of eThekwini for 2016/2017 plus four years comparative results;
- The 2017/2018 Integrated Development Plan;
- The 2017/2018 – 2019/2020 medium term budgets;
- The AG report on municipality for 2016/2017;
- Section 52/schedule C reports for eThekwini; and
- Statutory documentation for the category A municipalities.
- Industry comparative data;
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 Stable