September 15, 2017 / 9:27 PM / in 2 months

Fitch Affirms City of Marseille at 'A+'; Outlook Stable

(The following statement was released by the rating agency) PARIS, September 15 (Fitch) 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. Marseille's long-term issues, including a EUR700 million EMTN programme, have been affirmed at 'A+'. Its short-term issues, including a EUR200 million commercial paper programme, have been affirmed at 'F1'. The ratings of Marseille reflect its sound budgetary performance with an expected current margin of close to 13% in the medium term, and its national importance as the second-largest French city with a major harbour. These strengths are somewhat offset by a large stock of debt. The affirmation with Stable Outlook reflects Fitch's unchanged expectations that the city will be able and willing to maintain its financial metrics at levels compatible with its ratings. KEY RATING DRIVERS Fiscal Performance (Strength) Fitch expects the city's current margin to remain on average close to 13% in the medium term, compared with an average of 13.5% over 2014-2016. A final EUR10 million cut in state transfers will slightly weaken the current margin in 2017, but this should partially be offset by tax revenue growth and by the new eligibility of Marseille to a higher share of the urban solidarity fund (DSU). Fitch views Marseille's tax flexibility as rather limited with tax rates already above the national average and a share of taxable households below the national average (53% for Marseille vs. the national average of 58%). However, Fitch is confident in the administration's ability to take appropriate actions, mainly on operating spending, to ensure healthy fiscal performance in the medium term. Debt and Liquidity (Weak) As Marseille scales down its multi-year investment programme, we expect capital expenditure to stabilise on average at around EUR190 million per year in the medium term (from EUR220 million in 2012-2016). The decline in capital expenditure should enable the city to maintain its self-financing capacity before debt amortisation above 100%, and therefore, to carry on reducing its debt. According to Fitch's base-case scenario, the city's direct risk payback ratio should stabilise at around 13 years (2016: 13 years). Direct risk reached EUR1.96 billion at end-2016, following reduction for the second year in a row (2% reduction in 2016 and 2015 each), due to lower capital expenditure. Fitch expects Marseille to continue to reduce its debt in the medium term, but at a slightly slower pace. Its debt is considered low-risk with the share of fixed-rate (post-swaps) at 68% in 2016. The city's liquidity is underpinned by predictable cash flows. Short-term liquidity needs are also covered by several revolving credit lines, committed bank lines, and regular use of the EUR200 million commercial paper programme. Institutional Framework (Neutral) The solvency of French sub-nationals is underpinned by the quality of their financial and administrative framework, which makes debt servicing one of their top spending priorities. French municipalities' fiscal autonomy is higher than regions' and departments', as they enjoy large rate-setting power over most of their tax revenue (Marseille has rate-setting autonomy over almost half of its operating income). Under the French "Metropolis" law, Marseille is affected by the gradual transfer of certain competencies during 2016-2020 to Metropolis of Aix-Marseille-Provence (AMP; A+/Stable/F1). The amount of expenditure being transferred will be offset by a decline of an equivalent amount of operating transfers received from AMP. Economy (Neutral) Marseille is differentiated from other major French metropolitan cities by its high unemployment and a lack of high value-added industries. However, its position as the second-most populous French city means economic prospects are underpinned by sustained state spending, increasing private investment and tourism development. Management and Administration (Strength) Fitch views Marseille's financial management as sophisticated and prudent, particularly in terms of the city's forecasting ability, which allows Marseille to control its annual budget and debt commitments. Debt and liquidity management is conservative with 68% of outstanding debt at fixed rates, a smooth amortisation profile, and a reasonably large range of short-term financing options. RATING SENSITIVITIES A current margin consistently below 10%, combined with a direct risk payback ratio consistently above 17 years and failure to stabilise direct risk stock, could lead to a downgrade. An upgrade - unlikely at present - would require an operating margin consistently above 20% and sustained reduction of the city's direct risk stock. Contact: Primary Analyst Nicolas Miloikovitch Analyst +33 1 44 29 91 89 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Arnaud Dura Director +33 1 44 29 91 79 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. 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