Johannesburg - Ratings agency Global Credit Ratings' rating panel has taken the decision to increase eThekwini Municipality's long term rating to AA (double A), from AA- (double A minus) previously, as well as increasing its short term rating to A1+, from A1 previously.
This rating is indicative of a very strong protection factors and credit
Although adverse changes in business, economic or financial conditions would increase investment risk this would not be significant, GCR said in a statement on Tuesday.
GCR has also incorporated an expected loss methodology into their local authority analysis recently, which provides additional support for the increased risk ceiling in local authorities. Expected loss is a factor of
the probability of default as well as loss severity (ie net of recoveries).
The historical loss severity on municipal debt tends to be comparatively low relative to other industry sectors, despite a high historical default
frequency in the local authority sector.
eThekwini's rating took cognisance of the fact that the municipality continued to display a sound financial profile and high liquidity levels
over the review period, whilst stable and predictable revenue flows continued to be evidenced.
Furthermore, eThekwini has funded the significant majority of its capex from internal cash flows, and this remained the position in the year to June 2003.
A R397m decrease in net debt was registered during F03 (F02: R488m decrease), implying that only internal funding was required to meet the municipality's capex needs.
The significant level of spending by council on the stimulation of the regional economy was viewed favourably, although it is noted that the municipality does not receive a substantial amount of capital assistance
from provincial government to assist in this regard.
GCR noted that, despite an improvement in F03, the relatively high proportionate spend on staffing serves to place a degree of pressure on eThekwini's financial flexibility.