COVID-19-driven border restrictions a blow to bridge bonds, Texas economy

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The 28 bridges and border crossing points between Texas and Mexico will remain open to essential traffic and trade, but the partial closure will deliver another economic blow to the Lone Star State as it reckons with a collapsing oil market.

“It’s a new reality,” said Noe Hinojosa Jr., whose firm Estrada Hinojosa & Co. advises most of the municipal bond credits on the border. “We’re living in historic times. The municipal bond market is shut down. I’ve never seen anything like this in my life.”

Pedestrians on the bridge linking El Paso, Texas, and Ciudad Juarez, Mexico, in August. All 28 Texas-Mexico border crossings are now closed for everything but trade and essential traffic.

Most of the Rio Grande bridges were financed with toll revenue bonds by local governments in collaboration with the federal government of Mexico.

President Trump on Friday announced that the U.S. and Mexico had agreed to limit border crossings to essential business and commercial traffic to slow the spread of the coronavirus that causes COVID-19. That followed a similar agreement for the Canadian border. The order brought confusion to Texas border towns, where relatives on both sides of the river frequently cross and where Mexican students often commute to U.S. schools.

“Essential travel would be medical and educational travel, and emergency response,” Laredo Mayor Pete Saenz said. “Tourism and recreational travel would not be considered essential.”

Yvette Limon, director of the bridge system for the city, said Monday the impact of the closings has not yet shown up in toll collections.

However strict the order was intended to be, it brought an immediate drop to wait times for vehicle crossings. Delays of up to two hours were reduced to five minutes on some of the bridges in El Paso, officials reported. On Laredo’s World Trade Bridge Monday morning, trucks were taking five minutes to cross, less than half the normal time, according to U.S. Customs and Border Protection data.

As with the other dramatic changes that have come with the COVID-19 pandemic, local officials and their financial advisors have had no time to report the partial closure as a material event.

Ratings analysts who cover the cities, counties and bridge systems along the 1,294 Texas-Mexico border have also had little time to absorb the latest economic news.

In assigning a negative outlook on the nation’s toll sector in the pandemic, Moody’s analyst John Medina noted that single-asset facilities are vulnerable to declining revenue.

“The most exposed are the single-asset publicly managed toll roads or bridges, but most of them also have strong resiliency and liquidity to help them to similarly absorb a traffic and revenue shock,” Medina said. “Coverage will decline in 2020 compared to 2019 for nearly all toll roads, but liquidity will remain strong. Across the board we would expect there to be a rebound or a steady recovery unless GDP begins to decline.”

While commercial traffic will be allowed to cross, some factories on the U.S. side are shut down. Toyota announced a two-day closure of its San Antonio truck factory this week after General Motors, Ford Motor Co. and Chrysler-Fiat agreed to temporarily shutter plants across North America to safeguard workers. That announcement included GM’s assembly plant in Arlington, Texas.

“We expect US auto sales will decline in 2019 and 2020 which could negatively affect cross-border traffic as well given that trade volumes predominantly consist of automotive parts,” Moody’s analyst Julie Meyer wrote in a November report that rated the Laredo Bridge System’s debt A2 and A3 with a stable outlook.

Moody’s identified “federally imposed restrictions that reduce international trade and border crossings” as the top factor that could lead to a downgrade of the bridges credit.

The automakers shuttle car parts and assemblies across the border by rail. The auto industry was already suffering a downturn when the COVID-19 shutdowns began in late February. Noncommercial vehicles are the top export to Mexico, followed by automotive parts.

“Cooperation should include steps to keep supply chains open and safe, facilitate essential travel between both countries, and administer aid to refugees and other migrants, such as those individuals held in detention facilities in the United States and awaiting court dates in Mexico,” El Paso area government leaders said last week in a joint statement with the Borderplex Alliance, an association of business and civic leaders on both sides of the river.

The partial shutdown comes amid Trump’s campaign against illegal immigration and continued construction of a border wall in Texas that was funded as a national emergency when Congress refused to provide tax dollars to build it.

For businesses along the border, Trump’s earlier threat to close the bridges over immigration policy had begun to fade when the new announcement came. Canada ratified the U.S., Canada, Mexico Trade Agreement on March 13, following approval by the U.S. and Mexico. The USMCA replaces the North American Free Trade Agreement that made Laredo the busiest inland port in the nation.

“USMCA just won approval,” Hinojosa said. “For anyone to do a bridge financing, USMCA has to be in place. Historically, new bridges take six to 10 years to produce net revenues, but when you have a situation like this there are not going to be any new financings.”

Much of the cross-border commerce involves oil and gas as producers in South and West Texas look for export markets amid a glut. With West Texas Intermediate Crude closing below $20 per barrel on Friday, energy companies are taking drastic measures.

The Texas Railroad Commission that regulates the industry said that producers in the state — heretofore loathe to seek any government involvement in their industry — were seeking some kind of production controls. Some have also sought to get state officials involved in halting the price war launched by Russia and Saudi Arabia that flooded the market just as stocks were collapsing.

IHS Markit estimates that gasoline demand will fall 55% through April while jet fuel will be halved. The result is a growing glut that will further depress fuel prices and erase profit margins.

Although the Texas economy proved resilient after the 2014 oil price collapse, the economic blows registered in sales tax collections and in toll revenue data on the border. In 2015, the Pharr-Reynosa Bridge, financed with toll revenue bonds, recorded a loss of nearly $2 million after growth of $384,265 the previous year. Revenues did not return to positive until 2018.

Pharr recently announced a $30 million project at the bridge aimed at expediting border crossings for oil and natural gas products, as well as perishable goods such as avocados from Mexico, said Luis Bazán, general director of the Pharr-Reynosa International Bridge.

“This project is of great importance for the border with Mexico, because the international bridge connects with Reynosa, Tamaulipas,” Bazán said. “It is also the only full-service port for exports and imports in Hidalgo County, Texas.”

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