Moody's downgrades Mangaung Municipality even further

Ratings agency Moody's on Tuesday downgraded the Mangaung Municipality's long-term global scale issuer rating to Caa1 from B3 and its long-term national scale rating to from and placed the rating under review with direction uncertain.

This comes after Moody's already downgraded the municipality, situated in the Free State, three notches from Ba3 to B3 in August 2019 - both levels being junk status.

The short-term global scale issuer rating of NP and short-term national scale rating of were affirmed on Tuesday.

Moody's said in a statement its decision to downgrade Mangaung's ratings to Caa1 stems from poor governance and management practices that resulted in missed debt service payments on two loans worth a combined R51.9 million to Development Bank of SA (DBSA) and Standard Bank in December 2019.

Mangaung's poor governance resulted in the city being placed under administration, a process which has further delayed the ability to provide debt service payments.

Moody's pointed out that for the 2020 fiscal year the municipality adopted an unfunded budget, which is in contravention of the Municipal Finance Management Act (MFMA).

"Following a series of governance failures, National Treasury withheld R174 million in operating grant funding that was due to the municipality in December 2019. Mangaung was relying on the timely receipt of these funds for its operating requirements," explains Moody's in a statement.

"Mangaung's liquidity challenges are largely due to poor revenue collection and increasing operating expenditures."

It points out that, to date, the municipality is awaiting the formal appointment of the administrator by the provincial government, the terms of reference which will guide the work of the administrator and the creation of the financial recovery plan.

"In addition to the high risk stemming from poor governance, Mangaung also faces material environmental and social risks. As with the rest of South Africa, Mangaung (located in the Free State province) is subject to drought conditions which expose the city to water shortage concerns," says Moody's.

"Demographic trends that support growth in the population and urbanisation add to pressure to build infrastructure to meet increased demands. The municipality also faces a high unemployment rate, which directly affects the ability of its residents to pay for services and increases the number of households that are entirely dependent on the municipality for basic services."

Moody's could change the outlook to stable or upgrade the ratings in the event that the administration process results in an improvement in the metro's liquidity position and operating performances, and minimises potential losses on the two current loans in arrears.

At the same time, Moody's would consider downgrading Mangaung's ratings even further if the liquidity profile deteriorates even more and if losses to creditors exceed Moody's current expectations.

* Compiled by Carin Smith

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