Toll Roads Are Not the Road Less Traveled

June 1, 2017

Toll Roads Are Not the Road Less Traveled Photo

Many of us traveled this past Memorial Day Weekend to spend time with family and friends, and more importantly, honor all of those who have served our country so bravely. I imagine that more than a few of us utilized one of the many toll roads across the U.S. in our travels. While you may have had to skillfully maneuver around potholes in the roadway, you can take comfort in the fact the financial health of our toll roads is riding high.

Today’s chart shows the marked improvement in toll road debt service coverage following the downturn spurred by the 2008/2009 financial crisis. Total transactions saw recent annual growth up a meaningful 4.6%. This is driven by the continued economic recovery and significant decline in oil prices. Volume growth has led to very strong revenues, which are up almost 70% from 10 years ago and up 38% from five years ago. As a result, we now sit with debt service coverage at a decade high of 2.6 times.

An added strength of the toll road sector is the ability to raise toll rates to offset volume declines. Additionally, the sector has limited exposure to pension and Other Post-Employment Benefits (OPEB) pressures faced by state and local governments. Generally, there is also limited competition from alternate routes and demand is quite inelastic.

Key Takeaway:

The sharp growth in toll road volumes has broadly led to a fundamentally improved toll road authority credit profile. While economic growth is a strong factor for credit performance, largely autonomous rate setting authority and a proven willingness to act have dampened periods of depressed traffic volumes. With the details of a new federal infrastructure bill yet to be revealed, the significant improvement in toll road credit has increased the capacity for additional debt and provides the financial flexibility to address our aging roads and bridges.

Tags: Chart of the Week | U.S. economy | Reform | Infrastructure | Economic growth | Debt service coverage

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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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