FINANCING Standard & Poor

FINANCING

Standard & Poor’s

approach to rating toll bonds

Rating agencies like Moody’s and S&P influence how easily and at what cost toll projects get financed. Insights into how they go about determining their AA, B-etc ratings are of interest. S&P’s Apr 6 “Public Finance” newsletter to clients carries a 6 page commentary from analyst Peter Bianchini on what they look at.

Bianchini writes that ultimately what determines the success or failure of a toll road is whether it offers motorists time savings worth substantially more than the toll cost. S&P likes projects with value of time saved at least twice the toll charges to generate strong customer support. Links with the rest of the roadway network are important and the facility must have no strong untolled competition, either from geographic or environmental factors, or by binding government commitment. Many toll road disappointments have been due to unforseen failure to get good connections to the road network, or to unexpected ‘free’ competition, he says.

Congestion relief toll roads will generally be easier to assess than projects to access new development, the potential users being known with greater certainty in the first case. Forecasts based on high early growth rates or accelerated growth will generate skepticism at the rating agency. Investment grade rating is likely for solid projects with operating profits 1.5x debt service coverage. Toll rates assumed are important because low toll rates with the possibility of increasing them will make for a stronger project.

S&P’s often calculates how quickly maximum annual debt service (MADS) will be covered by operating profit. Most start-ups S&P has rated take 10 to 15 years, Bianchini writes.

Freedom to adjust toll rates is an important consideration. Taiwan toll projects have suffered in ratings because toll rates are out of control of the managers. Start-up projects must have a risk analysis to discern the likelihood of difficulties getting the project built on time and on budget. Numerous bridges and tunnels, difficult terrains and soils, and much land to acquire, all count toward higher start-up risk. Costs per km are a good proxy of complexity. US projects have ranged from $6m to $30m/km compared to $6m to $10m/km for interstates.

S&P discusses the use of a special purpose entity to protect lenders from insolvency of the project company due to unrelated failures. For non-recourse lending, the ranking of lien claims relative to other claims on collateral will be a strong indication of credit quality of the obligations. Unsecured lending transfers the focus of analysis to the borrowing entity and away from the toll project somewhat.

Management strength has to be assessed and very different skills are needed in the design and construction period, as compared to staff needs in operation: “Marketing of the new road is very important especially in the early years.”

Bianchini writes that over the long haul most toll roads generate good traffic, but this is little consolation to investors who suffer default because of overoptimistic forecasts. S&P says its investment grade rating represents an opinion that investors can expect full, timely repayment so long as there is no significant change from assumed operating conditions.

The paper has a list of 39 toll road bond ratings in the US and 15 outside. Highest rates (AAA) is Oresund (Sweden-Denmark), followed by AA for the Oslo toll system concessionaire, Corfiroute (Fr), NJ Hwy Auth (Garden State Pkwy), with AA- held by Caltrans Bay Bridge bonds, and the Ohio Tpk Com. A+ is held by Florida’s Tpk, Illinois, Oklahoma, El Paso bridge, McAllen br, and Halifax-Dartmouth Br Comm. (Contact Peter Bianchini, S&P 415 765 5009)