OREANDA-NEWS. September 15, 2015.  Fitch Ratings has affirmed the Italian region of Marche's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlook and Short-term foreign currency IDR at 'F2'. The rating action affects Marche's senior unsecured debt, including two bonds of nominal EUR557m at issue, with EUR540m outstanding at end-2014.

The affirmation reflects the Region of Marche's stable operating margin, albeit modest by international standards, and its low debt, which hovers around 30% of the budget.

KEY RATING DRIVERS
Debt: Fitch expects Marche's stock of bonds and loans, which accounted for EUR1.09bn at end-2014, to remain below EUR1.2bn over the medium term. In its base case scenario, Fitch expects debt servicing to hover around 4% of operating revenue, or EUR130m on average in the medium term, with the debt servicing cover ratio at around 1.3x the operating balance, from 1.7x in 2012. Marche's debt sustainability is expected to remain robust, with a debt-to-current balance of around 10 years in 2015-2017, matching the average life of debt. Liquidity remains comfortable at historically about EUR150m on average, or 1.2x debt service requirement.

Fiscal performance: Fitch expects that the operating margin will remain close to EUR200m, or 5% of revenue over the medium term. Possible cuts in state subsidies will continue to be absorbed by cost reductions. Fitch expects Marche's budget to remain close to balance, as state and EU capital subsidies will continue to fund the largest share of about EUR850m investment over 2015-2017 with minor contribution of borrowing.

Management: Marche remains among the top five Italian regions for good budgetary practices. Its per-capita health care costs are below the national average, facilitating a revenue and spending match, which Fitch considers a supportive rating factor, given that the sector absorbs 80% of the regional budget. Fitch factors in continuity in management policy over the medium term, including fund balance surplus, which according to Fitch's calculation, turned positive in 2013, overcoming the deficit of 8% posted in 2008.

Institutional framework: Marche's standalone profile is constrained by Italy's IDR (BBB+/Stable). This reflects the cap at the sovereign rating for ordinary statute regions, as they lack the financial autonomy that can isolate their finances from the national government and make them eligible for a rating higher than the sovereign one. Marche benefits from national state support, such as transfers and sustain in case of unpredictable events, but remains subject to contributing to Italy's consolidation efforts to balance the national accounts, with repeated revenue curtailments.

Economy: After a stagnant 2014, Fitch expects a slightly recovery in GDP to 0.3% at end-2015, stabilising regional revenues at about EUR3.5bn. The growth in exports to EU countries (+14% in 2014) of pharmaceuticals, textiles and transport, offsets decline in textiles and shoes to Russia and supports the growth in GDP and reduction in unemployment to 10% in June 2015 from 11% in 2013.

RATING SENSITIVITIES
Given the sovereign cap, Marche's rating would be downgraded in parallel with Italy if the sovereign rating is downgraded. Deterioration of the operating performance to a level that would not fully cover debt servicing requirements could be rating negative. A deterioration in the unreserved fund balance back towards deficit close to 10% of the budget could also be negative.

Conversely a revision of Italy's Outlook to Positive could lead to a similar rating action on Marche, provided the region continues to perform in line with Fitch's projections.