Credit ratings downgrade: Ekurhuleni may sue Moody’s over reputational damage

The City of Ekurhuleni has rejected Moody’s Investors Services recent credit rating and intends to sue for reputational damage following the downgrade rating of the city.

Moody’s yesterday revealed Ekurhuleni’s credit ratings were reduced further into junk status, which reflected an increased risk of the metro’s financial decline amid weakening governance.

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The ratings agency lowered Ekurhuleni’s long-term issuer (domestic) and senior unsecured ratings to Caa2 from Caa1 and its baseline credit assessment (BCA) to Caa2 from Caa1.

A Caa2 credit rating meant an entity’s debt was rated as poor quality and very high credit risk. It was also eight notches into noninvestment grade or junk status in terms of Moody’s ratings.

Moody’s also placed Ekurhuleni’s ratings and BCA on review for further downgrade, together with putting the City of Tshwane’s ratings on review for a downgrade.

Tshwane currently has a Caa2 long-term issuer rating. It also downgraded Ekurhuleni’s national scale issuer and debt ratings (NSR) to B3.za from B2.za and placed these on review for further downgrade. Ekurhuleni spokesperson Zweli Dlamini said Moody’s rating downgrade was “unsolicited”.

Dlamini said the city had no formal agreement with Moody’s Investment Services for such evaluations and their financial integrity remained sound.

“We urge our stakeholders to focus on forthcoming reviews by our officially designated rating agency, scheduled after our annual financial statement release,” he said.

According to Moody’s, the actions followed the failure of the two cities to submit their audited financial statements to the Johannesburg Stock Exchange (JSE) by the deadline of 29 February, seven months after the financial year-end of 30 June, 2023.

It was understood the JSE announced on 1 February this year that Ekurhuleni and Tshwane’s listing of debt securities and the registration of their programme memoranda would be suspended if they failed to submit their audited financial statements by this deadline, as stipulated in the JSE’s debt listings requirements.

Ekurhuleni is SA’s fourth-biggest municipality, while Tshwane is the country’s administrative capital and fifth-biggest city.

Tshwane and Ekurhuleni are among more than half of South Africa’s municipalities which are in dire financial straits.

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“Although the timing of a potential suspension and the subsequent delisting of the notes is uncertain, in Moody’s view the failure of the two cities to submit their audited financial statements has increased the risk of a debt acceleration should a delisting occur and of potential defaults ultimately, given their weak liquidity position,” Moody’s stated.

“The decision to place the ratings of Ekurhuleni on review for further downgrade and the ratings of Tshwane on review for downgrade reflects the increased risk of debt acceleration and potential default of the two cities.

“Moody’s understands that the failure to submit the financial statements to the JSE by 29 February leads to a phase where the two cities will start a dialogue with the JSE to present their line of defence and indicate the date for the submission of their audited accounts.

“The delisting and suspension of bonds could put the cities in a weak liquidity position, which could increase their risks of a default.”

While auditor-general (AG) Tsakani Maluleke warned last year that many municipalities were nearing collapse with cash flow constraints, Dlamini said the city officially received the AG report on 29 February.

Ekurhuleni and the office of the AG are in a dispute over the delay of the metro’s 2023 audit report. Dlamini said the report was set to be tabled at the upcoming council meeting, after which it would be released to the public.

“We remain committed to transparent and responsible financial management, ensuring continued quality service delivery and development in Ekurhuleni. The city is currently considering its legal options to claim for reputational damage caused by the unsolicited review,” he said.