OREANDA-NEWS. April 28, 2015. Fitch Ratings has revised the City of Marseille's Outlook to Stable from Negative and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A+' and Short-term foreign currency IDR at 'F1'.

Fitch has also affirmed Marseille's EUR700m euro medium-term programme at 'A+' and its EUR200m commercial paper (billets de tresorerie; BT) programme at 'F1'

KEY RATING DRIVERS
Marseille's ratings reflect its sound budgetary performance and its national importance as the second-largest French city. These strengths are somewhat offset by the city's large stock of debt and weak socio-economic profile. The Stable Outlook reflects Fitch's view that the city will continue to post balanced budgets with an operating margin compatible with its current ratings.

The rating actions reflect the following key rating drivers and their respective weights:

HIGH
Fitch forecasts a stabilisation of Marseille's operating margin at a sound 17 % in 2017 as the city keeps average expenditure growth at maximum of 1% a year. In 2015, the operating margin should improve to 20.3 % (2014: 18.6 %). Despite a decline in state transfers, this improvement will be mainly driven by the combined effect of an increase in tax revenues and control of operating expenditure, partly driven by the transfer of EUR11.5m of personal costs in the ancillary budget of "Opera-Odeon" (created in 2015).

Marseille expects to curb operating spending through a series of structural spending cuts, which will continue to be implemented over the medium term. Despite high direct tax pressure, the city has indicated that it would consider raising taxes (as it has in 2015) if responsibilities were devolved to Marseille without proper financial compensation. However, we believe these measures may be insufficient to fully offset the decline of state transfers and growth of the most rigid spending items.

Marseille's ratings also reflect the following key rating drivers:

Direct risk (including ancillary budgets and financial commitments related to a football stadium) is expected to level off at EUR1.9bn in 2017 (173.1% of current revenue) compared with 180.5% in 2014. Due to financial charges related to the city's indebtedness, we expect a weakening current margin towards 10.3 % in 2017 (2014: 15.1 %). Despite an expected decline in capital expenditure, we estimate that it should result in a direct debt payback ratio of about 17 years in 2017.

Marseille's guaranteed debt remains high, at EUR1.1bn in 2014, and is mainly related to social housing. We do not consider this a material risk as social housing institutions are heavily regulated by the state.

The city's liquidity is underpinned by predictable cash flows. Short-term liquidity needs are covered by several revolving credit lines (EUR41.2m at 1 January 2015), two committed bank lines totalling EUR42m, and regular use of the EUR200m French commercial paper (BT) programme.

Fitch considers the city's financial management to be highly efficient, notably in terms of its forecasting ability, which allows Marseille to control its annual budgetary performance and debt commitments.

As the second-most populated French city, Marseille stands out from comparable cities because of its high unemployment, low-skilled workforce and lack of high value-added industries. Economic prospects are underpinned by sustained state support, increasing private investment and the development of tourism.

RATING SENSITIVITIES
A current margin below 10%, a direct risk payback ratio consistently above 17 years and failure to stabilise direct risk stock could lead to a downgrade.

A current margin consistently above 20 % and durable decrease of direct risk stock could lead to an upgrade.

Contact:
Primary Analyst
Arnaud Dura
Associate Director
+33 1 44 29 91 79
Fitch France S.A.S.
60, rue de Monceau
75008 Paris

Secondary Analyst
Olivier Jacques
Associate Director
+33 1 44 29 91 89

Committee Chairperson
Raffaele Carnevale
Senior Director
+39 028 79 08 72 03

Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable criteria, "Tax-Supported Rating Criteria", dated 14 August 2012, "International Local and Regional Governments Rating Criteria outside United States", dated 23 April 2014 on www.fitchratings.com.

Applicable Criteria and Related Research:
International Local and Regional Governments Rating Criteria - Outside the United States
Tax-Supported Rating Criteria

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