"Some roads are more inelastic than others."
August 7, 2008
By Audrey Dutton
The Bond Buyer
WASHINGTON - Gasoline prices at $4.00 or more per gallon for a prolonged period could depress toll road traffic and revenue, and compel governments to increase tolls to prevent credit rating downgrades, Moody's Investors Service warned in a report issued today.
Despite the warning, Moody's gave the government-owned toll road sector a cautiously stable outlook for the next year to 18 months, pointing to steady traffic in commuter-heavy metropolitan areas as a stabilizing factor. However, greater leveraging of toll road assets could put downward pressure on the sector's A1 median rating.
"We expect continued steady debt issuance, particularly as service area economies grow and toll facilities are tapped to undertake projects that local governments would rather not fund with taxes," the report said.
Traffic and revenue growth are likely to decelerate in some regions because of deteriorating economic conditions, Moody's said. But most toll roads rated by Moody's - especially those in major metropolitan areas - should see steady, if slower, gains in traffic and toll payments.
All but four of 45 government-owned toll roads that Moody's rates are stable, and its two ratings changes this year so far have been upgrades.
"The sector's credit strength reflects favorable historical economic conditions and traffic growth in the U.S., the low elasticity of demand experienced by many toll roads, and financial strength and stability of the sector," Moody's said in its sector overview.
Other factors keeping the sector stable are solid liquidity levels, the ability to independently increase toll rates, and the "relatively resilient underlying service area economies" for many major metropolitan areas that are served by toll roads.
Moody's gave examples of why some ratings were downgraded last year.
The North Texas Tollway Authority's revenue bond rating was downgraded by Moody's in November due to increased debt issuance and "steady toll increases" to support the additional debt, Moody's noted. Nevertheless, the traffic growth rate has remained steady. As of May, traffic was up 6% over 2007.
The Santa Rosa Bay Bridge Authority's rating was downgraded because traffic and revenue failed to meet expectations. The authority had to tap its debt service reserve fund to pay on its bonds. Lower-rated toll roads tended to be new, single-asset facilities that underperform because of local economic slowdown or "overly optimistic" predictions, the report said.
Moody's analysts said older, established toll roads linking residential centers with employment centers in both urban and rural areas are not likely to suffer from sustained drops in traffic. In fact, they said, established toll roads may be the exception to a national trend.
The U.S. Department of Transportation announced last week that drivers traveled almost 10 billion fewer miles in May than in that same month last year. It was the third-largest monthly drop in U.S. vehicle miles traveled ever recorded. All three of the largest monthly mileage drops were this year.
But "the numbers cited there are on all U.S. highways, not just on toll roads," explained Maria Matesanz, a Moody's senior vice president who authored the toll road sector outlook. Matesanz said the rate of traffic growth on toll roads "may have slowed a bit, but the usage isn't declining."
Analysts emphasized that a clear-cut trend has not yet emerged that shows toll road traffic and revenues are in trouble. If tolling does see a decline because of a prolonged period of high gasoline prices, toll increases may be necessary, the report indicated.
The report did not speculate on a breaking point at which drivers might stop using toll roads because of higher toll costs.
"There's always that point, and that potential, that you could be compounding the problem, so it is a balancing act," said Tom Paolicelli, Moody's vice president and senior analyst. "Some roads are more inelastic than others."
It remains unclear, the analysts said, whether the economy, gas prices, or a combination of both is causing the decline in traffic growth rates.
Slowing regional economies combined with high fuel prices have, however, already affected some toll roads more than others, the analysts said.
The report said the government-owned toll road outlook is "more uncertain" for 2009.
"Given the reluctance to increase federal and state taxes to the levels needed to close the funding gap for road and bridge infrastructure, Moody's expects the increased use of tolling to help pay for new transportation projects, leading to greater toll revenue-backed debt issuance," the analysts wrote. In addition, more leveraging of existing toll road systems "may have a negative impact on some credit ratings."
Moody's cited examples of trends that may bolster the sector's credit health.
Increasing use of electronic toll collection and open road tolling - or cashless tolling - and congestion pricing could bring in more toll revenues, the rating agency said. But the analysts recommended against sharp bumps in toll prices, suggesting instead that "gradual, smaller" toll increases may be more acceptable to drivers and lawmakers. Cashless tolling could speed the flow of traffic and cut operating and capital costs of government-owned toll road facilities, the report said.
"Also, as tolling becomes more electronic," Matesanz added, drivers may pay less attention to toll rates. "So they're a little bit more insulated from the toll rate increases."
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