S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Toll Road And Bridge Revenue BondsToll Road And Bridge Revenue BondsThe heavy costs associated with construction andmaintenance of roadways and bridges normallyrequire large amounts of debt, even for publiclyowned toll roads. The sizable debt burden, combinedwith the presence of competition, the potentialfor fuel shortages, toll sensitivity, and shiftingdemographic and economic factors, make it difficultfor a revenue bond issue secured solely by tollsto receive a Standard & Poor’s Ratings Services ratingabove the ‘A’ category. However, several wellestablishedtoll facilities, particularly toll bridgeswith limited competition and U.S. state toll authoritieswith very stable demand, low rates and welldefinedcapital programs now maintain ratings inthe ‘AA’ category. For privately owned toll roadsthat benefit from very long-term concessions, butare highly leveraged, high investment-grade categoryratings are difficult to achieve given the highdebt levels relative to cash flow generation, combinedwith the ongoing pressures to distribute equityto shareholders.Traffic DemandToll road ratings focus on traffic demand as themost essential ingredient for a financially successfuloperation. For “green field” or “start-up projects”construction risk also demands significant analysis.Strong demand for a toll facility is vital to its successfuloperation and the ability of the facility togenerate toll revenues. Most U.S. toll roads havebeen, and will be developed in heavily traveled corridorswith a demonstrated need to relieve trafficcongestion and reduced travel time for motorists.However, in some cases, demand for improved servicehas not been strong enough or developed fastenough to generate revenues sufficient to cover theoperation and maintenance expenditures of thefacility, as well as debt service. This is particularlytrue for new toll roads, expansions or extensionsbuilt in anticipation of future development. In otherinstances, the healthy, vibrant economic base thathad supported the system deteriorated, resulting inflat or declining traffic flow.Typical questions to pose when evaluating theseprojects include:■ Is the project a new road or bridge to ease congestionon overcrowded existing roads, or is it designedto spur or in expectation of new development?■ What is the composition of vehicles between commercialand private vehicles as well as trip purpose?■ Will all access roads or connecting roads notunder direct control of the project team be inplace prior to the completion of the project?Ultimately, how do the timesavings provided bythe toll facility relate to the toll structure?Answers to these questions begin to identify thevarious strengths and weaknesses of a project andwhat information will be needed for Standard &Poor’s analysis. Toward this end, Standard &Poor’s expects a detailed feasibility study reviewingthe underlying economic underpinnings and project-specificissues that result in the projected trafficand revenue forecasts. The forecasts should clearlystate all assumptions used and extend through thedebt offerings repayment term. In some instances,Standard & Poor’s may request an independentevaluation of the traffic report (should the feasibilityreport be generated by the project sponsor) toverify and collaborate the reasonableness ofassumptions and methodologies applied.Evaluating the economic strength and diversity ofthe toll road’s region is integral to the ratingprocess. Standard & Poor’s will analyze the region’swealth, income, and employment indicators, as wellas a host of other factors. While a sound and growingeconomic base usually ensures a high level ofcommercial and business-related travel, the level ofdisposable personal income has a direct bearing onthe volume of discretionary and recreational trips.Commuter or short-haul traffic, indicated by suchmeasures as average trip length, largely depends onlocal economic conditions. However, those tollfacilities directly connected with other major thoroughfaresare shielded to an important degree fromlocal economic conditions.An examination of total traffic trends is not sufficient.The nature and composition of that travel, aswell as its vulnerability to business cycles, changesin fuel prices, and toll elasticity are also critical.While commercial traffic serves as a stabilizingforce, most successful toll roads or bridges have agood balance between commercial and private-vehicletrips. Commercial traffic is less sensitive to tollincreases than private-sector traffic since, for all butthe marginal carriers, additional costs can eventuallybe passed on to customers. Fuel prices have, onwww.standardandpoors.com145