OREANDA-NEWS. Fitch Ratings has affirmed the Metropolis of Aix Marseille Provence's (AMP, formerly Urban Community of Marseille or 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'. AMP's EUR400m EMTN programme and senior unsecured bonds' ratings have been affirmed at 'A+'/'F1'.

The affirmation reflects Fitch's view that the recent creation of AMP through the merger of MPM with five other inter-municipal groupings (Etablissements Publics de Cooperation Intercommunale; EPCI) is neutral for the ratings. The Stable Outlook reflects our central scenario that AMP will maintain a stable budgetary performance over the medium term and that debt metrics will remain compatible with the ratings.

KEY RATING DRIVERS
On 1 January 2016, MPM and five other inter-municipal groupings (the metropolitan communities of Aix-en-Provence, Salon-Etang-de-Berre-Durance, Aubagne, Martigues and the new town association of Ouest Provence) merged and were replaced by an enlarged EPCI, AMP. Although the effective implementation of the new entity has been delayed pending a constitutional appeal regarding the composition rules of the metropolitan council, Fitch believes the recent confirmation by the French Constitutional Court that there is no breach with the Constitution will lead to a rapid operational setting of the new entity. The metropolitan council is expected to vote on AMP's first annual budget by the end of April 2016.

AMP gathers 92 constituent municipalities, with a population of 1.8 million. The merged entities, including MPM, have ceased to exist legally as EPCIs. Instead, they will take the form of organisational units (territorial councils) which are designed to operate within AMP, without legal status. AMP takes over all the EPCIs' assets and liabilities, including debt commitments.

According to our preliminary consolidated estimates, AMP's expected financial profile is consistent with former MPM's ratings. The latter represents about 60% of AMP's estimated consolidated budget, for approximatively 80% of its estimated consolidated debt. Consequently, the debt payback ratio is likely to decline. As of 2014, AMP's theoretical and estimated direct debt payback ratio would have been close to 8.8 years, against 12 years for MPM alone. However, in the medium term, the new entity's financial profile will depend on the policies taken by its executive body in accordance with a financial and fiscal agreement to be approved in 2016, as set by law. In the longer term, economies of scale may have an impact on spending.

Fitch understands that the full operational and financial constitution of the new entity will be progressive, and reach completion by 2020. Some transfers of municipal competencies, as well as related budgetary items, assets and liabilities (and possibly debt) to the metropolitan level are required, especially for the municipalities outside MPM's former scope. Therefore, Fitch will regularly reassess its analysis of the future entity's financial profile.

According to Fitch's baseline scenario, AMP will be able to maintain a sound operating margin over the medium term, in the range of 11%-13% until 2017. Capital expenditure is expected to remain sizeable in the medium term. A number of large 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-2015, MPM's direct debt was EUR1.6bn or a high 132% of current revenue and 12.1 years of current balance. According to our preliminary estimates, AMP's direct debt payback ratio is likely to range from 9 to 12 years in the medium term. We estimate that about 3.5% of the theoretical consolidated direct debt was made of potentially risky debt products at year-end 2014 (including 1.3% renegotiated and desensitised in 2015). As of February 2016, AMP's liquidity position was underpinned by large surpluses (around EUR250m on average over the first two months of 2016, including a EUR85m cash advance made by the state treasury in January 2016), which more than covered cover the annual debt service (EUR194m in 2016), and around EUR175m available on bank and revolving lines.

Fitch expects the merger to lead to an enlarged economic base, with slightly higher average wealth parameters than for MPM alone. However, there are high discrepancies within the metropolitan area (the 2012 poverty rate ranged from 11.5% to 22.4% within the metropolitan area, against 13.9% nationally) and unemployment (13.1% at 3Q15 in Marseille area, against 9.8% in Aix-en-Provence and 10.6% nationally). In the medium to long term, Fitch believes economic prospects are underpinned by sustained public support, strong private investment and the increasingly important tourism industry.

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 towards 20 years could result in a downgrade.

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