OREANDA-NEWS. 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 issue ratings on Marche's senior unsecured bonds have also been affirmed at 'BBB+'.

The affirmation and Stable Outlook reflect Marche's stable operating performance, as well as the continued balanced health care budget. The rating also considers low regional debt and contingent liabilities, solid liquidity and strong management.

KEY RATING DRIVERS
Low Debt, Solid Liquidity
Marche's stock of bonds and loans accounted for EUR1.03bn at end-2015, or about one-third of the budget, when outstanding EUR506m bullet bonds are considered (gross of EUR320m provisions made for repayment at maturity) and EUR46m loans at charge of the state. In its central scenario, Fitch believes the regional stock of debt will remain below EUR1.2bn in the medium term, with debt service fully covered by the operating balance by about 1.3x. Marche maintains about 80% bonds and loans exposure to fixed interest rates and debt service requirements absorb less than 3% of operating revenue.

Stable Budgetary Performance
Fitch believes Marche will continue to post a balanced budget in the medium term, with a stable operating margin at around 5%, or EUR150m on average, albeit modest by international standards.

Further cuts in state subsidies will continue to be absorbed by a tight cost control, which could be complemented by tapping its budgetary leeway (totalling about EUR200m, or 5% of the budget, notably on personal income tax and business tax). Fitch expects the region will phase in an investment plan of around EUR500m-EUR600m over 2016-2017 mostly sized to non-debt resources, hence contributing to a balanced budget over the medium term.

After 2008 fund balance deficit, overcome in 2013 according to Fitch's calculation, we expect a positive free fund balance hovering at 5% of operating revenue in the medium term, offering additional protection against unexpected cash shortfalls.

Strong Management
Prudent management practices continue to maintain revenue/spending match with a steady commitment to maintain a balanced budget, including the health care sector, which absorbs 80% of the budget. The medium-term investment plan is mostly focused on projects aiming at boosting local economy recovery, such as the Interport, roads and new hospitals. At end-2015, as a result of active debt management, Marche purchased back EUR33m of regional bonds, financed by a 30-year fixed rate loan with the national government (Italy: BBB+/Stable), with annual savings of approximately 1% the annual debt servicing requirements, and the release of about EUR15m provisioned in the relative sinking fund.

Neutral 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. Marche benefits from national state aid, such as transfers and support in case of unpredictable events, but remains subject to contributing to Italy's consolidation efforts to balance the national accounts, with repeated revenue curtailments, testing the region's performance each year.

Modest Economy Recovery
Fitch expects that the tentative signs of recovery in 2015 will consolidate in 2016, with a GDP growing by about 0.5%, supporting stable regional tax base. The growing industry activities (about 1.4% at end-2015), driven by furniture and mechanics, offset decline in textiles and shoes, notably to Russia, further supporting GDP as well as the improvement in the employment rate towards 64% in 2015 (57% nationally), from 62.4% in 2014, and an unemployment rate around 9% (Italy 12%)

RATING SENSITIVITIES
Given the sovereign cap, 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.

Conversely, Marche's rating would be downgraded if the sovereign rating is downgraded. Although unlikely, deterioration of the operating performance to a level that would not largely cover debt servicing requirements could be rating negative. Deterioration in the unreserved fund balance back towards deficit close to 10% of the budget could also be negative.