OREANDA-NEWS. July 14, 2015. 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 'AA+(zaf)' rating on the COJ02 partially guaranteed bond still outstanding for ZAR0.5bn (final maturity in 2016) has also been affirmed

The affirmation reflects Fitch's expectations of CoJ's low debt, robust budgetary performance by international standards, conservative financial management aimed at maintaining high levels of liquidity and potential national support in light of its important status as the largest city in South Africa (BBB/BBB+/Negative). The ratings also take into account potential pressure on revenue generation stemming from a slowing economy amid structural features of high unemployment and demographic growth.

KEY RATING DRIVERS
Fiscal Performance (Strength): Johannesburg continues to perform in line with Fitch's expectations with an operating margin close to 15% of revenue in the 2015-2017 fiscal years. In FY2014 it posted a surplus of nearly ZAR6bn when netted for depreciation for fixed assets, or a 17% margin. CoJ's policy of tariffs for services to remain cost reflective will help absorb the likely 7%-8% increase in salary from the ongoing round of negotiations. The current balance will fund up to two-thirds of capital spending, which we expect to rise towards ZAR10bn by FY17, from about ZAR7.5bn in FY14. Fitch expects the balance before debt to range from a small surplus to a small deficit of about ZAR2bn, or 5% of total revenue, as capital subsidies for investment moderate borrowing requirements.

Debt (Strength): Fitch views CoJ's debt as sustainable at around 40% of recurrent revenues. The stock of bonds and loans accounted for ZAR15.8bn in June 2015 and will likely rise to ZAR20bn by FY17 to partly fund capital spending. Fitch expects direct debt service (interest and principal) to continue to be covered by the operating balance over the medium term, and debt stock to remain at three to four years of the current balance. Provisions into the redemption fund, hovering around ZAR2bn-ZAR3bn, provide a buffer against repayment peaks such as a ZAR1.7bn bullet bond due in 2018.

Management (Neutral): CoJ aims to maintain cash balances around ZAR4bn-ZAR5bn, well in excess of annual debt servicing requirements. The 25% rise in trade receivables to ZAR5bn in FY14 partly reflected a change to accrual accounting for rents and fines as adjusted tax and fees collection rates remained around 93%. While a more extensive use of pre-paid meters supports expectations of improving cash inflows over the medium term, with average collection rates edging towards 95%, the 75% level of provisions for difficult to collect revenue is above international Fitch-monitored peers and protects CoJ against risks of liquidity pressure.

Economy (Neutral): Johannesburg is the wealthiest city in South Africa with an estimated GDP per capita of about 50% above the national average of USD12,250 and the nation's financial and corporate hub. Against a backdrop of national economic slowdown, 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 3% per annum over the medium term, conducive to an expanding tax base when coupled with slightly rising population.

Institutional Framework (Neutral): Fitch assesses South Africa's inter-governmental relations as "Neutral" to CoJ's ratings. To finance part of their functions and responsibilities subnationals receive subsidies, primarily from the national government, based on established criteria and regulation aimed at preserving the ongoing viability of each subnational. However, in case of inability to deliver basic services or meet financial commitments, proportional settlement contributes to regaining fiscal balance.

The COJ02 bond is rated two-notches above Johannesburg's senior unsecured rating of 'AA-(zaf)', based on a 40% partial credit guaranteed provided on a several and not joint basis by the International Finance Corporation and the Development Bank of Southern Africa. The guaranteed amount, added to the standard unsecured recovery of 40% in South Africa, is consistent with the two-notch uplift based on Fitch's Criteria for Third-Party Partial Credit Guarantees

RATING SENSITIVITIES
The probability of a positive rating action on CoJ in the near term is low due to the Negative Outlook on the sovereign.

Conversely, developments that could lead to negative rating action include a 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 trade payables and receivables.