Mexico’s clean air rules could mean toll road decline

The outlook for Mexico’s toll road sector remains stable, Fitch Ratings said in a recent note, despite stricter regulations that effectively prohibit the majority of vehicles from circulating in the Mexican capital in an effort to combat rising air pollution.

Known as Hoy No Circula (HNC), Mexico City’s clean air rules have been in effect since 1989 with varying degrees of stringency. From 1989 and until mid-2015, driving vehicles over eight years old was not permitted in the city during daylight hours on particular days. In July 2015, however, the restriction was expanded to include vehicles with relatively dirty emissions regardless of age.

The latest and most prohibitive restriction, which came into effect on 5 April, is set to expire 30 June.

If the broadening of the air pollution regulations is indeed temporary – a narrower restriction is set to go into effect on 1 July – Fitch does not expect a change in toll road ratings. “However, making those changes permanent could have a negative rating impact,” the ratings agency said.

According to Fitch, some concessionaires estimate that during the three-month period of the broader restrictions, traffic volume will decline around 10 percent. Even if those estimates are accurate, Fitch expects traffic volume decline to range between two and three percent on an annualised basis.

“Fitch believes declines will be primarily observed on roads with high commuter traffic, but that such a decline will not be enough to have an immediate impact on rated toll roads,” the ratings agency said.

Should the tougher measures become permanent after 1 July, toll roads’ cash flow available for servicing debt would likely become constrained, which might affect the assets’ credit profile. That will depend on the magnitude of cash flow constraint, credit-specific mechanisms and compensation mechanisms, Fitch said, noting that in this scenario it is likely that concessionaires will seek compensation for lost revenues from public authorities.

“Our outlook for the sector is Stable,” Fitch said. The toll roads Fitch rates that fall within HNC’s boundaries are the Mexico City North Bypass, Mexico City Beltway, Penon-Texcoco and Tenango-Ixtapan de la Sal.