Regional and Local Governments (RLGs) Moody's Approach - JUNE, 2018 - salga

 
Regional and Local Governments (RLGs) Moody's Approach - JUNE, 2018 - salga
Regional and Local Governments
(RLGs) Moody’s Approach
SALGA – Municipal Innovative Infrastructure Financing Conference   JUNE, 2018
Regional and Local Governments (RLGs) Moody's Approach - JUNE, 2018 - salga
Regional and Local Governments (RLGs) Moody's Approach - JUNE, 2018 - salga
Agenda
1.   Moody’s Sub-Sovereign Group
2.   List of rated RLGs in South Africa
3.   List of Metros and secondary cities
4.   Moody’s RLGs Rating Approach

               Regional and Local Governments (RLGs) Moody’s Approach, June 2018   3
Regional and Local Governments (RLGs) Moody's Approach - JUNE, 2018 - salga
Moody’s
Sub-Sovereign Group
Sub-Sovereign – A global presence
           49 analysts/associates located in 17 offices, serving 44 countries

           16 different nationalities speaking 17+ languages

           USD 1.51 trillion rated debt

                                     Stockholm
                                                                   Moscow
                        Toronto                     London
                                                        Paris Prague
                              New York                       Frankfurt
                                                   Madrid                         Beijing
                                                             Milan
                                                                                         Tokyo
                                                                                   Shanghai
                Mexico City

                                      Sao Paulo
                                                              Johannesburg                   Sydney
                                Buenos Aires

Sources: CSS data, AWT, Moody’s Database                                                         Rated debt (excluding US)

                                                  Regional and Local Governments (RLGs) Moody’s Approach, June 2018          5
Rating Universe: A Wide Array of Public
Entities
Two big families: 337 RLGs, 162 GRIs

                                              Regions
                                              Provinces
                     RLGs                     States
     337                                      Cities

                                                            Transportation
                                                            Higher Education
                                                            Water
                                                            Housing Association
                                   GRIs                     Utilities
                                                            Healthcare
              162
                                                            Specialized Lenders
                                                            Financial Institutions
                                                            Not for Profit

                    Regional and Local Governments (RLGs) Moody’s Approach, June 2018   6
RLG Ratings Universe by Geography
Credits spread over 44 countries

              Australia
                                                   » Strong presence in Canada and Mexico,
                           South
              and Asia    America
                                                     W.Europe & CEE/CIS
     Africa

                                         Western
                                                   » Issuer ratings dominant vs. debt ratings,
                                         Europe
                                                     capital mkt activity limited in many countries

                                                   » National Scale Ratings widely used in
                                                     Mexico, CEE/CIS, South Africa and Turkey

  North                                            » Africa coverage is limited to South Africa
 America
                                    Eastern
                                    Europe

                          Regional and Local Governments (RLGs) Moody’s Approach, June 2018       7
List of rated RLGs in
South Africa
South African Rated Sub-Sovereigns
(as at March 2018)
                                               Outlook         Global Scale           National Scale Rating
   METROPOLITAN MUNICIPALITIES
   City of Cape Town                           Negative        Baa3/P-3               Aaa.za/P1-za [1]
   Ekurhuleni Metro                            Stable          Baa3/P-3               Aaa.za/P-1.za [1]
   Johannesburg                                Stable          Baa3/P-3               Aa1.za/P-1.za [1]
   Nelson Mandela Metro                        Stable          Baa3                   Aaa.za
   City of Tshwane                             Stable          Ba2/NP                 A1.za/ P-1.za
   Mangaung                                    Stable          Ba2/NP                 A1.za/P-1.za
   LOCAL MUNICIPALITIES
   Rustenburg                                  Stable          Ba2                    A1.za
   Bergrivier                                  Stable          Ba3/NP                 Baa1.za/P-2.za
   Breede Valley                               Stable          Ba2/NP                 A2.za/P-1.za
   City of Umhlathuze                          Stable          Ba2                    A1.za
   DISTRICT MUNICIPALITIES
   Amathole District                           Stable          Ba1                    A2.za
   GOVERNMENT RELATED ISSUERS (GRI’S)
   City Power Johannesburg                     Stable          Baa3                   Aa1.za
   East Rand Water Care Company (ERWAT)        Stable          Ba1                    Aa3.za
                                               Ratings Under
    South African National Roads (SANRAL)                      Ba1/NP                 Aa3.za/P-1.za
                                               Review

Notes: [1] Issuer and debt ratings.

                                            Regional and Local Governments (RLGs) Moody’s Approach, June 2018   9
List of Metros and
Secondary Cities
Metropolitan municipalities have large
revenue base
                                                                               Total Revenue - 2017    Total Revenue - 2017
 Metropolitan Municipalities                                  Province                 (ZAR million)             ($ million)

 Buffalo City Metropolitan Municipality                      Easter Cape                       6,276                    483

 City of Cape Town                                          Western Cape                     38,404                    2,954

 City of Ekurhuleni                                            Gauteng                       31,457                    2,420

 City of Johannesburg                                          Gauteng                       45,422                    3,494

 City of Tshwane                                               Gauteng                       30,401                    2,339

 Ethekwini Metropolitan Municipality                        Kwazulu Natal                    33,539                    2,580

 Mangaung Metropolitan Municipality                           Free State                       5,767                    444

 Nelson Mandela Bay Metropolitan Municipality                Easter Cape                       9,802                    754

Source: National Treasury & issuers’ financials

                                                  Regional and Local Governments (RLGs) Moody’s Approach, June 2018       11
Metros’ population growth rate from
2011 – 2016 continue to exert spending
pressure
     FREE STATE:                                                                           GAUTENG:
     Mangaung 2%                                                                          Ekurhuleni 6%
                                                                                        Johannesburg 12%
                                                                                          Tshwane 12%

                                                                                        KWAZULU NATAL:
                                                                                          eThekwini 6%

                                                                                        EASTERN CAPE:
  WESTERN CAPE:
                                                                                         Buffalo City 7%
     Cape Town 7%                                                                        Nelson Mandela
                                                                                            Bay 10%

Source: Statistics South Africa

                                  Regional and Local Governments (RLGs) Moody’s Approach, June 2018        12
Secondary cities largely depend on
transfers for capital infrastructure
                                                                            Total revenue - 2017      Total revenue- 2017
 Secondary cities                                  Province                         (ZAR million)               ($ million)

 Emfuleni                                           Gauteng                                5,584                       429
 Msunduzi                                        Kwazulu Natal                             4,576                       352
 Rustenburg                                       North West                               4,277                       329
 Polokwane                                          Limpopo                                3,114                       240
 uMhlathuze                                      Kwazulu Natal                             3,007                       231
 Mogale City                                        Gauteng                                2,585                       199
 Mbombela                                         Mpumalanga                               2,587                       199
 Emalahleni                                       Mpumalanga                               2,470                       190
 Matlosana                                        North West                               2,402                       185
 Matjhabeng                                        Free State                              2,254                       173
 Sol Plaatje                                     Northern Cape                             1,905                       147
 Madibeng                                         North West                               1,879                       145
 Drakenstein                                     Western Cape                              1,883                       145
 Newcastle                                       Kwazulu Natal                             1,750                       135
 Govan Mbeki                                      Mpumalanga                               1,665                       128
 George                                          Western Cape                              1,643                       126
 Steve Tshwete                                    Mpumalanga                               1,449                       111
 Stellenbosch                                    Western Cape                              1,519                       117
 Tlokwe                                           North West                    (2016 AFS) 1,270                        98
Source: National Treasury, issuers’ financials

                                                 Regional and Local Governments (RLGs) Moody’s Approach, June 2018       13
Population growth rate from 2011 –
2016 also exert spending pressure for
secondary cities
          NORTH-WEST:                                                                    LIMPOPO:
        Rustenburg 14%
                                                                                         Polokwane 12%
            Matlosana 5%

               Tlokwe 10%                                                                GAUTENG:
           Madibeng 12%                                                                  Emfuleni 2%
                                                                                         Mogale City 6%
  NORTHERN CAPE:
                                                                                         MPUMALANGA:
           Sol Plaatje 3%
                                                                                         Mbombela 6%
                                                                                         Emalahleni 15%
     WESTERN CAPE:
        Drakenstein 12%                                                                  Govan Mbeki 15%

                George 7%                                                                Steve Tshwete 21%

      Stellenbosch 11%                                                                   KWAZULU NATAL:
                                                                                         Msunduzi 10%
            FREE STATE:                                                                  uMhlathuze 11%
          Matjhabeng 6%                                                                  Newcastle 7%
Source: Statistics South Africa

                                  Regional and Local Governments (RLGs) Moody’s Approach, June 2018       14
Moody’s RLGs
Rating Approach
RLGs: The Approach

       RLGs are “enduringly linked” to their respective sovereign.
  1    The sovereign’s credit quality will to some extent anchor the
       credit quality of the RLG

       Sovereign and Sub-Sovereigns are likely to be affected by

  2    similar external factors. Sub-Sovereigns do not posses
       special autonomous characteristics that insulate them from
       sovereign-related risks

       Sub-sovereign issuers tend to be highly exposed to the same
  3    macroeconomic and financial sectors pressures which affect
       the central government.

             Regional and Local Governments (RLGs) Moody’s Approach, June 2018   16
How sovereign credit quality affects
other ratings
Slower economy
Slowing or contracting economic                                                       Austerity measures
activity can have wide-ranging
consequences                                                                       Defensive sovereign actions may include
                                                                                   austerity measures which reduce or delay
                                                                                                     government payments

Financing costs
Liquidity constraints and higher                                       Exchange and interest rates
financing costs resulting from                                          Unfavourable changes to exchange rates, interest rates
diminished investor confidence                                                                                 or price levels

Regulation                                                                            Political uncertainty
Government interference or
                                                                                    Increased risk of political uncertainty and
changes in regulation
                                                                                                         civil or labour unrest

                                   Regional and Local Governments (RLGs) Moody’s Approach, June 2018                       17
Rating Approach:
BCA and Extraordinary Support
    F1. Economic Fundamentals
    F2. Institutional Framework
                                               Operating Environment             Extraordinary
    F3. Financial performance & Debt profile     (typically reflected in
                                                                                 Support Range
    F4. Governance & Management                 Sovereign bond rating)

            Assessment of                        Assessment of
           idiosyncratic risk                      systemic risk

                         Baseline Credit Assessment

                                                  RLG Rating

                                    Regional and Local Governments (RLGs) Moody’s Approach, June 2018   18
Assessing Idiosyncratic Risk
                                        Financial performance        Governance
    Economic        Institutional
                                                   &                     &
     Strength         Strength               Debt profile            Management

                         Idiosyncratic Risk

                Regional and Local Governments (RLGs) Moody’s Approach, June 2018   19
Assessing Idiosyncratic Risk
                                                              Financial performance           Governance
       Economic                       Institutional
                                                                         &                        &
        Strength                        Strength
                                                                   Debt profile               Management

   Why it matters
   An RLG's ability to service its debt depends on, among other factors, the sufficiency
   and reliability of its future revenues. Relative economic performance will likely impact
   an RLG’s ability to generate own-source revenues and its dependence on fiscal
   transfers. In general, a relatively wealthier region would have a more productive tax
   base and could therefore generate necessary own-source revenues more readily.

   How it’s measured in the scorecard
   » Regional GDP per capita as a percentage of national GDP per capita
   » Economic volatility is assessed by evaluating an RLG’s economic diversity

                                           Idiosyncratic Risk

                                Regional and Local Governments (RLGs) Moody’s Approach, June 2018          20
Assessing Idiosyncratic Risk
                                                                Financial performance              Governance
        Economic                       Institutional
                                                                           &                           &
         Strength                        Strength
                                                                     Debt profile                  Management

   Why it matters
   The institutional framework encompasses the arrangements that determine intergovernmental
   relations and shape RLG powers and responsibilities. This factor addresses the RLG's public-
   policy responsibilities and the adequacy of its fiscal powers to meet them. It also addresses
   the way in which these responsibilities and powers may be altered, whether by a higher tier
   entity or by the RLG itself.

   How it’s measured in the scorecard
   » We gauge predictability, stability and responsiveness by assessing whether and how RLG
     powers and responsibilities may be altered in response to changing circumstances.
   » We gauge financial flexibility by evaluating own-source revenue flexibility and the RLG
     sector's spending flexibility

                                            Idiosyncratic Risk

                                 Regional and Local Governments (RLGs) Moody’s Approach, June 2018              21
Assessing Idiosyncratic Risk
                                                               Financial performance             Governance
        Economic                      Institutional
                                                                          &                          &
         Strength                       Strength
                                                                    Debt profile                 Management

   Why it matters
   Financial performance is the product of accumulated decisions of policy makers regarding an
   RLG’s revenue structure and expenditure base, as well as the economic environment in
   which the government operates. The government's debt profile includes the amount of debt,
   the burden it poses, its structure and composition, as well as past trends and future
   borrowing needs – all important determinants of credit quality.

   How it’s measured in the scorecard
   » Ratio of gross operating balance to operating revenue
   » Ratio of interest payments to operating revenue
   » Cash and liquidity management
   » Debt burden
   » Debt structure

                                           Idiosyncratic Risk

                                 Regional and Local Governments (RLGs) Moody’s Approach, June 2018            22
Assessing Idiosyncratic Risk
                                                            Financial performance       Governance
       Economic                     Institutional
                                                                       &                    &
        Strength                      Strength
                                                                 Debt profile           Management

   Why it matters
   Our assessment of a government's credit standing includes an assessment of the
   quality of financial decision-making and execution with a review of the government
   structure, financial management practices and the transparency of financial
   disclosures.

   How it’s measured in the scorecard
   We evaluate each RLG’s:
   » Risk controls and financial management practices.
   » Investment and debt management policies and practices
   » Transparency and disclosure practices

                                         Idiosyncratic Risk

                               Regional and Local Governments (RLGs) Moody’s Approach, June 2018     23
Assessing Extraordinary Support

     Baseline Credit Assessment                                        Extraordinary Support

      Extraordinary support is defined as the likelihood that a higher-tier government would
      aid an RLG in the event that it faced acute liquidity stress or act in such as way as to
      help avoid a default of its debt obligations. Support could take different forms, for
      example, a one-time cash infusion or any action facilitating negotiations with lenders
      that enhances access to interim financing for the RLG.

                                        RLG Rating

                        Regional and Local Governments (RLGs) Moody’s Approach, June 2018        24
Introduction of Ranges for Support

» Consistent with the support ranges for government-related issuers, we
  have refined our support classifications into five ranges: low (0% -
  30%), moderate (31% - 50%), strong (51% - 70%), high (71% - 90%)
  and very high (91% - 100%).
» To arrive at a decision concerning the degree of support, we consider
  factors within three main areas:
  – Institutional framework;
  – Historical behaviour; and
  – Individual characteristics.

                      Regional and Local Governments (RLGs) Moody’s Approach, June 2018   25
Summary Idiosyncratic Risk Scorecard
and Weights
Scorecard                                                         Sub-factor weighting       Factor weighting
1. Economic fundamentals                                                                                 20%
1.1 Economic strength                                                            70%
1.2 Economic volatility                                                          30%
2. Institutional framework                                                                                20%
2.1 Legislative background                                                       50%
2.2 Financial flexibility                                                        50%
3. Financial performance and debt profile                                                                 30%
3.1 Operating margin                                                            12.5%
3.2 Interest burden                                                             12.5%
3.3 Liquidity                                                                    25%
3.4 Debt burden                                                                  25%
3.5. Debt structure                                                              25%
4. Governance and management                                                     MAX                      30%
4.1 Risk controls and financial management
4.2 Investment and debt management
4.3 Transparency and disclosure

                                      Regional and Local Governments (RLGs) Moody’s Approach, June 2018    26
Rating process: in five steps to the first
time rating
                                                                               Moody’s provides agenda and
  1. Informal talk with           2. Formalisation of the                      information requirements for
                                                                               face-to-face meeting
        Moody’s                       rating mandate

                                                             3. Formal rating meeting
                                                                   with Moody’s

5. Issuer notification on          4. Analysis and rating
  assigned rating and             decision on the basis of                      Feedback in advance of
  potential publication             the committee vote                          the Rating Committee

                            Regional and Local Governments (RLGs) Moody’s Approach, June 2018            27
Daniel Mazibuko              Sebastien Hay                     Mauro Crisafulli
Associate Lead Analyst       Senior Vice President / Manager   Associate Managing Director
+271.1217.5481               +349.1768.8222                    +3902.9148.1105
daniel.mazibuko@moodys.com   sebastien.hay@moodys.com          mauro.crisafulli@moodys.com

                                                                 moodys.com
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action
  information and rating history.

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                                                                               Regional and Local Governments (RLGs) Moody’s Approach, June 2018                                                                                                     29
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