Fitch still bearish on US toll roads

Ratings agency Fitch has reaffirmed its negative rating outlook on the public US toll road sector, though it said that traffic is now decreasing at a slower pace and the economic downturn may bear important lessons for private toll road operators in the future, according to a recently published sector report.

Toll roads: not as well- travelled as before

Since August 2008, when Fitch indicated that its outlook for the sector was negative, it has downgraded four toll roads, placed six on “negative” rating outlook and revised only two rating outlooks from “negative” to “stable”. The revisions represent “significant change” for its portfolio of 40 facilities that have been relatively stable over the last five years, Fitch said.

Urban bridge systems with monopolistic market positions, such as the Triborough Bridge & Tunnel Authority in New York, were least pressured by the economic environment, followed by expressways, turnpikes and standalone facilities, or toll roads that function as a piece of a larger system.

Viewed in the context of other infrastructure assets, though, toll road performance is not as bleak as it seems.

“Interestingly enough, if you look at the declines in throughput at airports and containers, the toll roads have been hit the least,” Fitch Analyst Mike McDermott, one of the authors of the report, told InfrastructureInvestor.

He said the average enplanement reductions at airports have been about 12 percent and some facilities have seen decreases way above that. But toll roads have yet to match the 10 percent reduction in traffic that Fitch said was possible in its August 2008 sector outlook.

“Now it’s kind of approaching that but appears to be stabilizing,” McDermott said.

He believes that long-term traffic growth will resume by 2011, but he sees two scenarios for how the economic recovery will impact the toll road sector. One scenario would be that the sector’s growth drops down because of 10 percent to 12 percent reductions in traffic but then reverts back to the same trend line as before the downturn. Or, because of changes in the economy, traffic could remain on a lower long-term trend line and “you lose that chunk of money forever”, McDermott said.

“From a conservative standpoint, we’re assuming the latter,” he added.

Fitch also expects that, for the first time in US history, the cost of highway travel will increase in real terms. But not all toll road facilities have equal ability to raise tolls. Unlike publicly-run toll roads, many privately-operated facilities already have very high toll rates and further increases may result in revenue decreases, McDermott said.

Still, there are important lessons for the private sector from how the economic downturn has impacted public toll roads. Many of them depended on short-term reserve facilities to meet their debt service obligations – reserves which probably should have held longer durations.

“There were instances where the financial community was trying to say you only need 6 months and, in our view, we think that’s not enough. This [downturn] has obvious lasted more than 6 months,” McDermott said.

Quality of reserve capital is also important. Many public toll road authorities had reserve facilities provided to them by weak counter-parties in the form of surety policies instead of cash. When those providers – such as monoline insurers MBIA and Ambac – weakened financially, many toll roads found themselves in a situation where their credit ratings were higher than those of their surety providers.

“One thing that we think makes sense is that they begin to replace those sureties with cash,” McDermott said.