OREANDA-NEWS. Fitch Affirms Metropolis of Aix Marseille Provence at 'A+'; Outlook Stable Fitch Ratings has affirmed the Metropolis of Aix Marseille Provence's (AMP, formerly Urban Community of Marseille or MPM) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A+' with Stable Outlooks and Short-Term Foreign Currency IDR at 'F1'. AMP's EUR400m EMTN programme and senior unsecured bonds' ratings have been affirmed at 'A+'/'F1'.

The affirmation reflects Fitch's view that the recent creation of AMP through the merger of MPM with five other inter-municipal groupings (Etablissements Publics de Cooperation Intercommunale; EPCI) is neutral to the ratings. The Stable Outlook reflects our central scenario that AMP will maintain stable budgetary performance over the medium term and that its debt metrics will remain compatible with the ratings.

KEY RATING DRIVERS

On 1 January 2016, MPM and five other inter-municipal groupings (the metropolitan communities of Aix-en-Provence, Salon-Etang-de-Berre-Durance, Aubagne, Martigues and the new town association of Ouest Provence) merged and were replaced by an enlarged EPCI, AMP. Following delays pending a constitutional appeal regarding the composition rules of the metropolitan council, the new entity is now operating. As scheduled, the metropolitan council in April 2016 voted AMP's first annual budget.

Fitch believes that AMP's full budgetary integration will be progressively achieved by 2020. Notably, a fiscal agreement to be approved later in 2016 will specify the metropolis' full budgetary scope. According to the NOTRe law (Nouvelle Organisation de la Republique), some transfers of municipal competencies, as well as related budgetary items, assets and liabilities (and possibly debt) to the metropolitan level are required. Over the longer term, spending may benefit from economies of scale. Fitch will accordingly reassess the future financial profile.

Under our central scenario, AMP's budgetary performance will remain consistent with the current ratings, with an average operating margin of 12%-13% in 2016-2018 (14% in 2012-2015 under MPM's former scope). Our scenario factors in sluggish revenue prospects, due to falling state transfers up to 2017 and a moderately growing tax base. We expect operating spending to grow slightly faster than revenue, due to the former's limited flexibility resulting from mandatory transfers and staff costs (about 70% of total).

Fitch expects capital expenditure to remain sizeable over the medium term at around EUR590m on average until 2018 due to large transport investment programmes and the need for enhanced infrastructure within Marseille's urban area. We forecast the metropolis' self-financing capacity to decline to 40% in 2016-2018, compared with 50% on average for MPM over 2012-2015.

At end-2015, MPM's direct debt was EUR1.7bn (including EUR116m of short-term debt) or a high 141% of current revenue and 13 years of current balance. According to our baseline scenario, considering the expected weaker self-financing capacity and the resulting direct debt increase, AMP's direct debt payback ratio is likely to be close to 12-13 years in 2018. Apart from high-risk structured debt products (2% of debt), AMP's debt profile is sound while bullet repayments are provisioned for.

As of end-June 2016, AMP's liquidity position was underpinned by large cash surpluses (around EUR270m on average for 5M16, including a EUR85m cash advance made by the state treasury in January 2016), and around EUR160m available on bank and revolving lines.

The merger provides AMP with an enlarged economic base, with slightly higher wealth parameters than MPM's. However, sharp divergences exist within the metropolitan area; unemployment at end-4Q15 was 12.6% in the Marseille area, against 9.4% in Aix-en-Provence and 10% nationally, while in 2012 the poverty rate ranged from 11.5% to 22.4% across the six EPCIs, against 13.9% nationally. Over the medium - to long-term, Fitch believes economic prospects are underpinned by sustained public support, steady private investment and an increasingly important tourism industry.

RATING SENSITIVITIES

An improvement in debt metrics, with a lower debt payback ratio, to below 10 years, could lead to an upgrade.

Higher-than-expected increases in both operating and capital expenditure or slower-than-expected growth in operating revenue leading to sustained deterioration in the debt payback ratio towards 20 years could result in a downgrade.

KEY ASSUMPTIONS

We currently assess the merger as having a neutral impact on AMP's ratings, due to MPM's former neighbouring EPCIs' lower debt and similar budgetary performance ratios. Once more accurate data become available, we will reassess the impact.