Toll Roads Face Long Road to Recovery: Bad News for Funds Eyeing Infrastructure

The typically stable asset class has been hit as traffic levels have dropped 40% to 85% globally, S&P analysts say.

Pension fund leaders looking to expand into infrastructure will want to steer clear of toll roads for the time being. The typically stable asset class could take a year or more to recover from the pandemic, according to S&P Global Ratings.  

Traffic levels at global toll roads have fallen 40% to 85% since the coronavirus crisis and shelter-in-place policies ushered people indoors, spelling trouble for revenues from the typically stable asset class, analysts said. 

Investor interest in alternatives is growing during uncertain market conditions. Infrastructure assets, of which toll roads are a subset, amount to about 4.5% of investor portfolios, according to a Preqin survey. But about 77% of investors in each asset class have said they intend to maintain or increase capital investments into alternatives. And about 87% of respondents said infrastructure returns met or exceeded expectations. 

A number of pension funds have made investments into toll roads, notably Canadian institutional investors. The Canada Pension Plan Investment Board (CPPIB), which has several sizable stakes in Toronto toll roads, made its first Indonesian toll road investment last year. Promises of a growing economy have spurred some investors to look into toll roads in emerging markets. 

That may have all changed now, particularly in places where the strictest measures were taken to curb the spread of the pandemic. Countries such as France, Italy, and Spain saw traffic levels at toll roads drop 80% to 85% almost overnight, the S&P report said. Over the past several months, other countries like India and China lifted tolls during the height of the pandemic.  

Toll roads in the US saw similar drops, particularly at dense, interurban highways that carried commuters to bustling metropolitan centers. The New Jersey Turnpike Authority reported that April was down 61.5% in traffic and 61.6% in revenue compared with the same time last year. 

Questions also remain for toll operators that do not have the liquidity or capital structure to absorb future shocks and losses in revenue if the economy does not make a speedy recovery—or if a resurgence in the COVID-19 disease means a return to mandated lockdowns. 

For example, the project-financed Canadian 407 International toll road reported a 75% drop in traffic in April and is projected to lose 35% in 2020, but it retained its rating because of a C$1.5 billion cash cushion to cover future operating costs. 

Meanwhile, the Pennsylvania Turnpike Authority, a not-for-profit toll road, reported that its cumulative traffic volume declined by half and expects about a $400 million to $500 million drop in revenue this year.

Other considerations, such as job losses and an increasing interest in sustained remote work, weigh on the future of the asset class. 

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