OREANDA-NEWS. Fitch Ratings has affirmed the French City of Marseille's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A+' and Short-term foreign currency IDR at 'F1' The Outlook is Stable.

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

Despite pressure on operating revenue due to significant cuts in state transfers, Fitch considers that Marseille will be able to limit the weakening of its budgetary performance to an operating margin at 16.7 % in 2018 (from 20.4 % expected at end-2015), a level still compatible with its current rating.

Fitch considers Marseille's fiscal leeway to be limited. In 2015, the city's housing tax rate (28.56%) and developed property tax rate (24.02%) are respectively above the average of the metropolitan cities (18.59 %; 17.19%). Fitch will monitor Marseille's ability to curb operating spending through a series of reforms the city is implementing (taken into account in Fitch's base case scenario).

Under the French "Metropolis" law, Marseille will progressively transfer some competencies to Marseille Provence Metropole (A+/Stable/F1+) between 2016 and 2020. Fitch expects the transfers of responsibilities will be financially neutral. However, some financial metrics based on current revenues could be mechanically affected by the base effects (equivalent reduction of revenues and expenditure) and in the absence of details, no adjustment could be made by Fitch at this stage.

Fitch believes Marseille's capital spending programme can be cut back to EUR162m in 2018 compared with an expected EUR199m at end-2015. However, this cutback would not be sufficient to offset the weakening of its current balance, given a capital expenditure self-financing rate of 98.2% compared with an expected 120% for end-2015.

Fitch expects direct risk to level off at EUR1.9bn in 2018 (175.6% of current revenue) compared with an expected 174.4% for 2015. However, following a slower budgetary performance over the medium term, direct risk payback could weaken to a maximum of 19 years in 2018 (from an expected 11.4 years in 2015). Fitch expects the city to use some of its financial flexibility (on raising revenue, notably through its taxing authority, and curbing expenditure) to avoid reaching this peak. Debt service coverage is weak with debt servicing-to-operating balance forecast at 97.5 % for 2015.

The city's liquidity is underpinned by predictable cash flows. Short-term liquidity needs are covered by several revolving credit lines, two committed bank lines, and regular use of the EUR200m BT programme.

Marseille is the second-most populated French city. It 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% (2014: 13.6 %), 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 sustained decrease of direct risk stock could lead to an upgrade.