22-07-2014: Fitch affirms City of Johannesburg credit ratings stable
Rating agency, Fitch Ratings has affirmed the City of Johannesburg’s National Long-term rating at ‘AA-(zaf)’ with a Stable Outlook, the National Short-term rating at ‘F1+ (zaf) and the National senior unsecured ratings on the outstanding bonds at ‘AA-(zaf)’.
The agency has also affirmed the City of Johannesburg’s Long-term local currency Issuer Default Rating (IDR) at ‘BBB’ with a Stable Outlook.
A rating provides a relative measure of a city's creditworthiness; the best long-term rating for a country is AAA while the best short-term rating is F1+. The F1+ rating refers specifically to the city's ability to pay its short-term debt.
The ratings reflect CoJ’s:
Important status as largest City in South Africa, with local economy historically outperforming national economy;
Good management, with fair degree of sophistication and positively tested access to capital markets;
Strong and stable financial profile, with sustainable debt and improved liquidity.
The ratings also take into account the pressurised operating environment featuring high unemployment and strong demographic growth.
KEY RATING DRIVERS FOR THE MUNICIPALITY:
The affirmation of the City of Johannesburg’s ratings reflects the following rating drivers:
Institutional Framework: Johannesburg is the largest city in South Africa and the provincial capital of Gauteng, the wealthiest and most populous province in the Country. Municipalities govern subject to national and provincial legislation, and are entitled to an equitable share of revenue raised nationally to support the performance of their functions and responsibilities.
Economy: Johannesburg is the wealthiest city in South Africa and the nation’s financial and corporate hub. The municipality accounts for about 16% of national GDP and has a historical record of significantly higher rates of growth than the national economy. Fitch expects activity generated by the implementation of the City’s ZAR100bn 10-year investment plan to support the performance of CoJ’s economy leading to average GDP growth of about 2.5% in the medium term.
Debt and Liquidity: CoJ’s debt is sustainable. Fitch expects direct debt service (interest and principal) to continue to be covered by operating balance in the medium term and debt stock to remain in a range of 3 to 4 years of current balance. Fitch also expects CoJ’s debt revenue ratio to remain below the City’s self-imposed cap of 45% over the medium term. An average life of debt of about 7 years indicating low refinancing risk further underpins sustainability. Liquidity is expected to remain in excess of debt servicing requirements in 2015.
Preliminary data indicate that cash balances are around R5.5 bn for the year ending June 2014 on the back of recovering tax and fee collection rates, which are forecasted to have improved to 93% in the fiscal year ending June 2014 from 90% in June 2013. Liquidity is expected to remain in excess of debt servicing requirements through to 2015. Although fund balance/working capital is forecasted to have declined to about R1bn in 2014 from the level of about R2bn recorded in 2013 and 2012. According to preliminary figures CoJ’s sinking fund was valued at R3bn in June 2014, up from R2.5bn in June 2013.
Fiscal Performance: Up from the 11.4% recorded in FY2013, the City’s operating margin recovered to a sound 14.0% at end-June 2014. Against a CoJ’s projected rise to up to 20% by 2017, Fitch expects the margin to hover around 14% over the medium term, curbed by likely cost pressure as the City aims to remain cost-reflective in terms of purchase of goods and services amid inflation possibly edging towards 7%.
Good Management: CoJ is administered by capable and fairly sophisticated management, with internal guidelines for budgetary performance. Access to capital markets has proved successful since the City’s first issuance in 2004. The unqualified Auditor’s Opinion obtained in fiscal year 2013 indicates that the City is successfully addressing long-standing accounting issues.
RATING SENSITIVITIES
The probability of a positive rating action on CoJ in the near term is low owing to the negative outlook on the sovereign reflecting weak national growth and twin national budget and current account deficits.
Khomotso Letsatsi, Group Head: Treasury and Financial Strategy, says that “the City is delighted with the rating provided by Fitch and the City has once again proven financial stability. It just proves that all the City’s efforts to improve service delivery and sustain financial stability have paid off and we would like to encourage our communities, citizens and customers of the City to continue doing their bit in retaining a positive global economic position. The City would further like to thank the investor community for its continued support on the City’s funding programme”, says Letsatsi.
Issued by:
Kgamanyane Maphologela
Customer Communications and Stakeholder Relations
Group Finance
