Announcements

The Msunduzi Municipality placed on positive outlook

GCR has affirmed the Msunduzi Municipality’s (“Msunduzi”) national scale credit ratings of BBB(ZA) (triple B) and A3(ZA) (single A three) in the long and short term respectively.

The rating takes cognisance of the fact that Msunduzi experienced severe financial challenges in F10, which necessitated Provincial Government intervention, effective February 2010. This stemmed from weak management, failure to prepare the mid-year adjustment (and the FYE11) budget in time and other issues relating to poor internal controls and procedures. This in turn placed notable pressure on the municipality’s liquidity ratios and financial sustainability. An Administrator was subsequently appointed by the Provincial Government, who adopted four strategies to rectify the aforementioned problems. Although several of these strategies have been implemented (over the course of 2011), it is still management’s assumption that it will take some time for the municipality to fully recover. Note is, however, taken of the fact that as at December 2011, Msunduzi was deemed fit to continue operations without Provincial Government intervention. Concomitantly, the municipality commenced the process of appointing a permanent management team, with both the Municipal Manager (December 2011) and CFO (June 2012) positions now filled.

Note is also taken of the fact that Msunduzi evidenced a 9% contraction in total borrowings (following a moratorium on borrowings in F11), with gross gearing declining for the first time over the review period, to 22% (F10: 29%). Furthermore, and in spite of an anticipated uptick in borrowings in F12 (to address infrastructure backlogs), management has opted to address all capex through grant funding thereafter. Accordingly, gross gearing is budgeted to decrease to a low of 18% by FYE14.

Given the above, the ratings may be positively impacted by the ongoing progress in Msuduzi’s operational procedures, which is expected to result in a consistent improvement in cash flow managment and concomitant strengthening in key liquidity metrics. Further, the successful implementation of strategies to reduce the municipality’s poor debtors profile (which is characterised by relatively low payment levels, with a notably long dated ageing profile) would be positively viewed. Note is, however, taken of the fact that the municipality’s ratings may come under pressure in the event of additional strain on already weak liquidity metrics. Further, should there be increased uncertainty regarding future grant receipts, and/or a notably higher than budgeted rise in gearing metrics, the muncipality’s ratings may be negatively impacted.

Craig Davids

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