Globally, transport infrastructure assets have suffered a drastic drop in revenues as domestic and international bans on movement have curbed travel significantly. Public-private partnership toll roads have been no exception: in parts of the US and Canada, traffic levels have fallen by as much as 80 percent since lockdowns were implemented – far below our previous downside estimations. The impact on cashflows and revenues has surpassed any crisis seen before.
Although P3 toll roads have come under pressure from a credit perspective, the impact has been markedly less severe when compared with other transportation assets. Unlike passenger volumes at airports, for instance, road traffic is already beginning to pick up: June saw traffic return to pre-crisis levels for the first time since lockdown measures came into effect. Despite this, recent ratings actions have indicated that – depending on the characteristic of the toll road – recovery may still take longer than initially expected. As a result, for some P3 toll roads we have extended our estimations for full recovery from 2021 to 2022.
Of our seven publicly rated project financed P3 toll road projects across the US and Canada, current ratings actions present a mixed bag, with some expected to fare far worse in the short term. Those with a stable outlook are generally supported by strong existing liquidity, capital structure and sources of revenues.
For instance, ITR Concession Co, which operates and maintains the Indiana Toll Road, has a long operating history and acts as a major freight corridor within Indiana, as well as connecting the strong economic regions of the Midwestern and Eastern US. The toll road generates more than 70 percent of its revenues from freight traffic, which has proven resilient during lockdown compared with commuter traffic. What’s more, its long-term concession with no debt amortisation in the near term allows the toll road to weather the pandemic shock.
Similarly, the Nouvelle Autoroute 30, which provides a north-south link to bypass the congested Montréal Island in Canada, benefits from having a significant portion of its revenues in fixed availability payments. Its toll revenue-sharing mechanism also mitigates the risk of falling traffic.
“The impact on cashflows and revenues has surpassed any crisis seen before”
At the other end of the scale, toll roads with high exposure to commuter traffic and weaker liquidity buffers have been more likely to suffer downgrades or be placed on negative CreditWatch amid significant drops in traffic. In April, I-95 Express Lanes, a managed-lane project, was downgraded due to its high vulnerability to congestion levels. Given the availability of free general-purpose lanes on the route, revenues can potentially be zero when congestion is minimal. This creates increased risks for the project even though it provides a key south-north connection for commuter traffic.
In the same month, Virginia-based commuter road Toll Road Investors Partnership II LP was put on CreditWatch Negative. This was due in part to the increased probability that a covid-related decrease in traffic levels could cause forecast metrics to fall below the current minimum debt service coverage ratio. The potential for delays could also have an impact on proposed toll rates, which will require legislative approval at the state level.
Toll roads’ varying sensitivity to traffic declines makes the sector outlook more challenging to determine, which is why we have extended our recovery estimations for some toll roads. For instance, one important variation between projects is the proportions of commuter and truck traffic – and to what extent these types of traffic have been affected.
Certainly, data suggest traffic levels have been affected differently across the US. INRIX US’s latest Traffic Volume Synopsis shows that, in the month of June, state level passenger travel in New Jersey was still 30 percent below the pre-covid ‘control week’ (first week of March). In South Carolina, however, traffic levels increased by 4 percent from March’s data. Figures for long-haul truck traffic also presented mixed results: three states showed a decline of 10 percent or more compared with March’s traffic levels, while 23 states increased on the control week.
For some, these statistics might imply that recovery towards pre-covid levels is already underway. That said, seasonal adjustments tell a different story and reflect the fact that traffic levels still lag last year’s performance. In June 2019, the average passenger vehicle miles travelled were 16.5 percent higher than in February 2019, according to the Federal Highway Administration. As such, the 12 percent overall reduction in traffic since the control week translates to roughly 25 percent year-on-year – in line with S&P Global Ratings’ forecasts.
As evidenced in this data, truck traffic is expected to be markedly less affected than passenger traffic – with a 10 percent reduction expected through 2020 compared with a 25 percent drop in commuter traffic expected until at least November this year. Depending on the location and purpose served by the toll road, this could severely damage its revenues.
As such, having a strong liquidity buffer is important for protecting toll roads’ investor ratings – particularly as the longer-term outlook for the economy remains uncertain. So, too, are governance and the nature of the debt structure. Take ITRCC, for example, which filed for bankruptcy in 2014 following the lasting effects of the global financial crisis. The global toll road operator has since been acquired by IFM Global Infrastructure Fund, and as of June, the entity’s outlook had remained stable through the pandemic.
Given that the World Trade Organization has forecast global trade volumes could fall by up to 32 percent this year, we cannot rule out future limiting effects on truck traffic or a more drawn-out recovery. Certainly, we are now assuming a longer and greater decline in truck toll revenues as truck traffic is likely to be affected by a decline in GDP.
What’s more, the extent to which we embrace the ‘new normal’ could have a knock-on effect on traffic levels. If businesses continue to encourage home working and there is a marked reduction in business travel, toll roads that rely heavily on commuter traffic could see a fall in revenue. At the same time, we do expect to see road benefit from a fall in air travel and a tendency towards interstate road travel.
What can we expect?
Based on the current trajectory, and despite uncertainties surrounding the true period of recovery, we believe full recovery for our rated P3 toll roads is likely. If we consider China’s example, where lockdown measures are gradually being removed, key business indicators are showing positive signs across major industries. Road congestion levels are returning to normal, while highway traffic is generally exceeding levels reported in the previous year.
For shorter-term liquidity troubles, it is also possible that we might see an increase in toll rates where permitted, as was the case during the last recession. Nonetheless, it could provide a helpful boost for those struggling to meet revenue targets. At this time, in our opinion, covid-19 has not led to secular change, and recovery will vary from region to region. However, we expect that there will be recovery as opposed to a permanent reduction of traffic on the roads.
Trevor d’Olier-Lees is senior director, Infrastructure, North America, and Dhaval Shah is a director, North America for S&P Global Ratings