Keep your seatbelt fastened

If you are looking for a safe place to park your money, then European highways have not always been the best place for it. As GDP slumped in the aftermath of the crisis, traffic went down the same route. Heavily geared assets took a beating. Road operators reeled. And some countries turned into a no-go zone for institutional investors.

But all of this is probably old news. “Traffic has picked up nicely over the last two to three years,” says Mathias Burghardt, head of infrastructure at Paris-based Ardian. “There’s the economic recovery and low oil prices have also helped put people on the road.” Heavy vehicles have not quite followed suit, largely because continental growth and global trade have not exactly raced forward. But if there has been no recent European equivalent of Texas’ SH 130 – which filed for bankruptcy in March – it is partly thanks to the resiliency of leisure traffic.

On the ground the reality is a bit more complex, though. In a study published earlier this year, ratings agency Fitch observes that economic weakness in Southern Europe and competition from free alternatives have been major factors behind the sub-par performance of some Iberian toll roads in recent years. While these remain relevant today, the ratings agency notes that they are probably subsiding: traffic growth is rebounding across the eurozone, with an average rise of 3.9 percent for the companies it rates.

Fitch believes debt structure has now become an equally important differentiating factor when assessing the credit quality of rated operators. In the study, the company notes that networks like Spain’s Abertis and Italy’s Sias, Autostrada Brescia Verona Vicenza Padova (ABVP) and Milano Serravalle Milano Tangenziali (MSMT) have a corporate-style debt structure with loose or no covenants and exposure to increased leverage, which makes them more likely to have their ratings come under scrutiny.

By contrast, Portugal’s Brisa wins plaudits for being “the most creditor-protective debt structure with a set of tight covenants applied on a single concession, ring fenced from other activities of the group”.

Refinancing risk is another crucial factor identified by Fitch, with the likes of Abertis, Atlantia/Aspi and France’s Autoroutes Paris-Rhin-RhÔne (APRR) on a comparatively strong footing thanks to a diversified range of bullet maturities and ready access to capital markets. The agency is less impressed by ABVP and MSMT, for which refinancing risk is deemed “a key negative rating factor”. Brisa is in the process of diversifying its concentrated set of bullet maturities, the agency reports, while Sias is said to benefit from a balanced mix of amortising and bullet instruments.

Abertis, APRR and SIAS are rated BBB+ by Fitch, only bettered in their peer group by Atlantia at A-. Brisa meanwhile achieves BBB, with MSMT and ABVP at BB+. All ratings are assigned a stable outlook apart from MSMT’s and ABVP’s, for which prospects are deemed “negative”. Pricing systems, similar between toll road networks, are not seen by Fitch as a material differentiator. Operators’ experience in making long-term investments means capex plans do not play a meaningful role in explaining ratings either, according to the agency.


Fitch’s note is not alarmist. Its ratings actions of the past month actually convey a sense of stabilisation within the sector, in particular in Southern Europe. And while downgrades have not been rare in April, they have been largely targeted at the energy sector (an example being the Saudi Electricity Company) as well as shipping companies (Moscow-based FESCO is a case in point). By contrast, Italian toll road operator Sias and Lombardy-based Azienda Sviluppo e Mobilita exited a review process unscathed.

“The rating affirmation reflects solid traffic performance on the group’s network, moderate leverage and a robust, although complex, debt structure. Sias’ limited name recognition on capital markets is compensated for by a well-established relationship with a diversified network of national and international banks and a strong liquidity position,” the agency commented, reflecting the growing importance of debt structure and liquidity factors in its decision-making process.

And then, as Burghardt points out, there are less quantifiable risks. One is regulation – and associated contract renegotiation – which he says has picked up in recent years. “The French state used to be exemplary, but now a temptation sometimes emerges to re-open pre-agreed terms.” He is referring to APRR, Macquarie Atlas Roads’ biggest toll road asset, which threatened to take legal action against the French government last year after it deferred toll fare increases.

Burghardt also sees stubbornly stable prices as a limiting factor. “When inflation is low you have less margin for manoeuvre, because your financial costs are fixed and you can’t raise fares.” This is echoed by Fitch, which in a note released last month noted that “moderate but fragile eurozone economic recovery will support mild growth, while low inflation will weigh on short-term revenue growth”.

The evolution of risk factors, as well as changes pushed through by Eurostat to what should or should not be included on governments’ balance sheets, may prompt new types of toll road contracts to come on stream. While potentially unlocking further dealflow, the changes also create new, more complex risk-sharing arrangements between public sponsors and private entities.

That will require one thing from would-be investors: more time spent looking under the hood.