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9/15/2011
Credit Ratings Agency Warns of Tolling Troubles
Fitch Ratings reports toll roads imperiled by lack of sustained growth in the economy.

Fitch report
Toll roads at one point appeared to be unstoppable. Steady growth in traffic yielded rapidly rising profits, especially for pioneers in the field such as Australia's Macquarie Bank where executives became so rich from deals that included the leasing of US roads that it was dubbed the "millionaires' factory." That all changed when the recession took hold and motorists scaled back on the mileage driven each year. Losses began to mount, and as a report released last week by Fitch Ratings argues, the dynamics for tolling may not improve in the near future.

"Fitch tracks data on toll roads, bridges, and tunnels across its ratings portfolio," Fitch analysts wrote in the report, Downshifting: US Transportation Reacts as GDP Growth Flattens. "Traffic declined year over year as much as 10 percent during the Great Recession. Sustained positive growth in traffic commenced in February 2010. The most recent Fitch data indicates that growth in traffic volumes began slowly declining on tolled facilities, heading to zero growth in second-quarter 2011."

The US Bureau of Transportation Statistics reported a similar decline in commercial transportation services for both goods and passengers. Despite some recovery, the index remains below pre-recession levels. These transportation statistics mirror figures for consumer spending which began recovering early last year only to falter this March. Growth in consumer spending for the second quarter of 2011 was under 0.1 percent.

The credit ratings agency argues activity in the economy at large and the in the transportation sector are directly linked. When someone gets a job, he generally gets in his car to drive to work. When stores sell goods, the supplies, raw materials and final product are usually transported by truck. When unemployment is high and sales are low, such transportation activity drops.

"Higher oil and other commodity prices account for some of the change in consumer spending," the analysts explained. "Unlike past downturns, these prices are increasingly influenced by external factors as well as US demand. Consumers are reacting to increased prices and a weak labor market with belt tightening."

Fitch will not downgrade any existing credit ratings for toll roads because these operations have a monopoly position that enables them to recover from downturns by hiking tolls that many motorists have no choice but to pay.

"Tolled facilities have experienced low and even negative traffic growth since 2007," the analysts stated. "Revenues have grown at a much higher rate as facility operators reacted to the downturn by raising rates to preserve financial and operational flexibility."

The ratings agency warned that sustained periods of low economic growth imperils the financing of deals built with healthier traffic and economic forecasts in mind.

"Most public infrastructure facilities should be able to weather little to no growth scenarios over the next three to five years," Fitch wrote. "However, there are a number of issuers whose escalating debt profiles could pose a problem in the medium term. Newer toll facilities generally have such debt service profiles... Stand-alone, concession-based facilities, originally financed in 2006 - 2008 when expectations for future economic growth were very high, will be more vulnerable."



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