OREANDA-NEWS. Fitch Ratings has affirmed the Urban Community of Marseille's (also known as Marseille Provence Metropole, (MPM)) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A+' and its Short-term foreign currency IDR at 'F1'. The Outlooks on the Long-term IDRs are Stable. Its senior unsecured bonds have been affirmed at 'A+'.

KEY RATING DRIVERS
The ratings factor in MPM's below-national average socio-economic profile, large debt levels and the significant costs of its public services. These challenges are mitigated by sound operating performance, skilled financial management and the benefits of the institutional framework of France (AA/Stable).

According to Fitch's baseline scenario, MPM will maintain a sound operating margin over the medium term, at 13.8% in 2017, compared with an estimated 14.6% in 2014. Sharp cuts in state grants will mostly be compensated with steady growth in tax (up 2.1% a year until 2017, driven by tax hikes implemented in 2014 and regular growth of the tax base), equalisation transfers (for which MPM is one of the largest beneficiaries nationwide) and cost-cutting measures. MPM's management has expressed commitment to spending restraint with respect to hiring, general spending and grants.

Capital expenditure is expected to have reached a significant EUR319m in 2014, up from EUR298m in 2013. A number of large road and transport investment programmes are being contemplated for the medium term and the need for enhanced infrastructure are high within Marseille's urban area. However, MPM is looking to reprioritise and a reschedule its investment programme. Therefore, though still sizeable, capital expenditure is expected to progressively scale down, to an average of EUR256m in 2015-2017. Fitch estimates that MPM's self-financing of capital expenditure (after debt repayment) will slightly decline to 49% in 2015-2017, from 51% in 2010-2014.

Fitch estimates direct debt to have totalled EUR1.57bn at end-2014 or a high 132% of current revenue and 12.2 years of current balance. Fitch forecasts that debt will increase moderately to EUR1.62bn, or 135% and 14.7 years by 2017. MPM has access to capital markets, and is implementing an EMTN programme in the medium term. Debt structure is sound, with only 1.6% of debt lying in derivatives-based products.

Among French inter-municipal bodies, MPM's below-average socio-economic profile is manifested in its higher unemployment rate (13.4% in 3Q14, against 9.9% nationwide), a lower-skilled workforce and a lack of high value-added industries. However, Fitch believes economic prospects are underpinned by sustained public support, strong private investment and an increasingly important tourism industry. MPM's strategic importance as France's second major metropolitan centre (1.04 million inhabitants) and a major harbour, and its modern administration are also positive factors.

MPM's liquidity is supported by its predictable cash flow and tight monitoring. Short-term funding is mainly in the form of a EUR85m bank line and a EUR70m revolving loan.

In 2016, MPM will likely merge with five other inter-municipal groupings to create a wider inter-municipal body Aix Marseille Provence Metropole (AMP Metropole). Fitch believes this would result in an enlarged economic base and generate economies of scale compared with those of MPM currently. The law that will determine the structure of the new inter-municipal body is still under discussion. Fitch cannot yet assess the full financial and institutional scope of this new entity. Therefore, our data and forecast presented in this commentary are based solely on MPM's current scope of activities.

RATING SENSITIVITIES
A stronger operating margin of above 15%, and a debt payback ratio of below 10 years, could lead to an upgrade.

A higher-than-expected increase in both operating and capital expenditure or a slower-than- expected growth in operating revenue, leading to weaker budgetary performance, with an operating margin below 10%, and a debt payback ratio of 20 years could result in a downgrade.