WASHINGTON — Fitch Ratings this week released expanded global criteria that its analysts will use to evaluate debt secured by tolled facilities such as roads, bridges, and tunnels.
The report is the first time that Fitch has provided a drilled-down list of strong, mid-range, and weak attributes that would be found in each area of potential credit risk such as revenues, operations, debt structure, and legal structure.
“Once operational, [the toll facility’s] credit quality will be driven in large part by the combination of a few key factors,” which include the leverage and debt-structure compositions of the deal, demographic makeup of the region, historic and projected traffic, and overall financial profile of the entity, the report said.
Ratings also may be affected by legal and economic barriers to raising tolls.
The criteria will be applied in addition to the credit agency’s existing approach to overall infrastructure finance.
The report is meant to provide more clarity, transparency, and detail on Fitch’s approach to toll-secured debt; the last report on toll-road criteria was released in 2007.
One critical factor in determining a toll road’s success is the accuracy of its ridership estimates, which is why “there’s a significant amount of investigation that we go through in analyzing the traffic and revenue study that’s provided” in the development of the road, according to Cherian George, a Fitch analyst who worked on the report.
South Carolina’s Southern Connector toll road, which opened in February 2001 but filed for bankruptcy in June after ridership failed to meet original estimates, was one of the more recent crises resulting from a discrepancy between estimates and reality.
The Southern Connector is not rated by Fitch, George said.
The rating agency uses stress testing in its analysis of toll roads, trying to predict the value of a single driver’s time, he said. The analysts evaluate demographic assumptions used in the ridership estimates, as well as how much growth is expected in households that could contribute to toll-paying traffic.
“Lastly, we give little to no credit to land development, [or] the pace of projections for land development, because that has been notoriously incorrect,” George said.
The analytical approach described in the report will apply to standalone toll facilities as well as public toll authorities and private-sector entities — all of which are creating a growing universe of toll-backed deals, according to George.
Fitch rates close to 50 toll road entities in the U.S., including private-sector entities. But stand-alone projects make up the largest subset of new toll ratings, he said. Those include the LBJ/Interstate 635 and the North Tarrant Express managed lanes projects in Texas, he said.
The onset of public-private partnerships for toll roads “has been somewhat slower than people expected,” partly because there is typically a long gestation period for the projects, he said.
“We can see a steadily increased number of projects coming to market” in states that include Virginia, Florida, Texas, California, and Michigan, he added.
