Fitch Affirms City of Johannesburg at 'BBB'; Outlook Stable

Fri Jul 18, 2014 12:50pm EDT

(The following statement was released by the rating agency) MOSCOW/MILAN/LONDON, July 18 (Fitch) Fitch Ratings has affirmed the City of Johannesburg's (CoJ) Long-Term Local Currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. The agency has also affirmed the 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 its outstanding bonds at 'AA-(zaf)'. The ratings reflect CoJ's important status as the largest city in South Africa; its sound management, with a fair degree of sophistication, and successfully tested access to capital markets; and strong and stable financial profile, with sustainable debt and improved liquidity. The ratings also take into account an operating environment that is under pressure from high unemployment and strong demographic growth. KEY RATING DRIVERS Institutional Framework Johannesburg is the largest city in South Africa and the economic capital of Gauteng, the wealthiest and most populous province in the country. The entity is one of eight South African metropolitan municipalities. Municipalities govern their territories under national and provincial legislation, and are entitled to an equitable share of national revenue to finance part 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 an historical record of significantly higher rates of growth than the national economy. In a context of national economic slowdown, structural high unemployment and substantial immigration flows. Fitch expects activity generated by the implementation of the city's ZAR100bn 10-year investment plan to support the performance of CoJ's economy, and to lead to an average GDP growth of 2.5% per annum over 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 over the medium term, and debt stock to remain at three to four years of current balance. Fitch also expects CoJ's debt to revenue ratio to remain at below the city's self-imposed cap of 45% over the medium term. An average life of debt of about seven years indicating low refinancing risk further underpins sustainability. According to preliminary data, cash was ZAR5.5bn for the financial year ended June 2014 on the back of recovering tax and fee collection rates, which are forecast to have improved to 93% in the fiscal year ended June 2014 from 90% in FYE12. Liquidity is expected to remain in excess of debt servicing requirements through to 2015, although fund balance/working capital is forecast to have declined to about ZAR1bn in FY14 from the level of about ZAR2bn recorded in FY13 and FY12. According to preliminary figures CoJ's sinking fund was valued at ZAR3bn at FYE14, up from 2.5bn at FYE13. Fiscal Performance The city's operating margin recovered to a sound 14% at end-June 2014, from 11.4% in 2013. Fitch expects the margin to range between 14% and 15% over the medium term, compared with CoJ's project rise of up to 20% by 2017. Operating margin is likely to be held back by higher expenses, driven by increased costs of goods and services in an economic environment where inflation could rise to 8%. Sound Management CoJ is run by capable and fairly sophisticated management, with internal guidelines for budgetary performance. Access to capital markets has proved successful since the city's first issue in 2004. Unqualified auditor's opinion obtained in 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, which reflects weak national growth as well as twin national budget and current account deficits. Developments that could lead to a negative rating action are significant deterioration of budgetary performance with operating margin falling below 10% and/or tax and fee collection rates falling below 90% with a substantial rise in provisions for doubtful receivables. Contacts: Primary Analyst Mirta Fava Director +39 02 879087 293 Fitch Italia S.p.A. Via Morigi 6 - Ingresso Via Privata Maria Teresa, 8 20123 Milano Secondary Analyst Raffaele Carnevale Senior Director +39 02 879087 203 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 9901 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Tax-Supported Rating Criteria' dated 14 August 2012, 'International Local and Regional Governments Rating Criteria - Outside the United States' dated 23 April 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Outside the United States here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.