OREANDA-NEWS. September 15, 2015. Fitch Ratings has affirmed the Urban Community of Marseille, Marseille Provence Metropole's (MPM) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A+' with Stable Outlooks and its Short-term foreign currency IDR at 'F1'. MPM's EUR400m EMTN programme and senior unsecured bonds' ratings have been affirmed at 'A+'/'F1'.

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 and skilled financial management. The affirmation also factors in the prospect of the 1 January 2016 merger of MPM with five other inter-municipal groupings (Etablissements Publics de Cooperation Intercommunale; EPCI) and their replacement by an enlarged EPCI, the Metropolis of Aix-Marseille-Provence (AMP).

AMP will gather 92 constituent municipalities, with a population of 1.8 million. MPM and the five other entities will cease to exist legally as EPCIs. Instead, they will take the form of organisational units, or territorial councils, which are designed to operate within AMP, without legal personality. AMP will take over all the EPCIs' assets and liabilities, including debt commitments.

According to our preliminary consolidated estimations, based on publicly available data, AMP's financial profile is likely to be consistent with MPM's ratings. MPM represents about 60% of the future entity's estimated budget, for approximatively 80% of its estimated debt. Consequently, the debt payback ratio is likely to decline. As of 2014, AMP's theoretical and estimated debt payback ratio would have been close to eight years, against 12 years for MPM alone. However, in the medium term, the financial profile of the new entity will depend on the policies taken by its executive body, to be elected by the end of 2015. In the longer term, economies of scale may have an impact on spending.

Fitch understands that the operational and financial constitution of the new entity will be progressive, and reach completion by 2020. Some transfers of municipal competencies, as well as reliant budgetary items, assets and liabilities (and possibly debt) to the metropolitan level are required, especially for the municipalities outside MPM's current scope. This will be made through financial and fiscal agreements, to be taken from 2016 onwards. Therefore, Fitch will regularly reassess its analysis of the future entity's financial profile.

According to Fitch's baseline scenario, AMP will maintain a sound operating margin over the medium term, in the range of 13%-15% until 2017. MPM's management is committed to curbing spending through strict guidelines regarding hiring, general spending and grants.

Capital expenditure is expected to remain sizeable in the medium term. A number of large road and transport investment programmes are envisaged in the medium term and the need for enhanced infrastructure is high within Marseille's urban area. One of AMP's future priorities will be to enhance and develop transport infrastructure, especially the connections between the major urban centres that will form the AMP area.

At end-2014, MPM's direct debt was EUR1.57bn or a high 132% of current revenue and 12.2 years of current balance. According to our preliminary estimates, AMP's debt payback ratio is likely to range from 8 to 10 years in the medium term.

Of the French inter-municipal bodies, MPM's below average socio-economic profile is manifested by its higher unemployment rate (12.8% at 1Q15, 10% 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 the increasingly important tourism industry. Also, the merger will lead to an enlarged economic base, with slightly higher average wealth parameters.

MPM's liquidity is supported by its predictable cash flow and efficient tight monitoring. Short-term funding is mainly in the form of a EUR85m bank line and a EUR26m revolving loan.

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

A higher than expected increase in both operating and capital expenditure or slower than expected growth in operating revenue, leading to a sustainable deterioration in the debt payback ratio to 18 years could result in a downgrade.

KEY ASSUMPTIONS
We currently expect the envisaged merger will have a neutral impact on MPM's ratings. Fitch understands that the neighbouring entities that could possibly merge with MPM have lower debt and similar budgetary performance ratios. Once the merger has taken place and more accurate data is available, we will reassess the impact.