Toll-road bond investors can stop panicking over high gasoline prices.
A National Public Finance Guarantee Corp. report on the toll road sector yesterday concluded the economy has far greater influence on how often and how far people drive than the price of gas.
And as the economy stabilizes, the municipal bond insurer expects the revenue securing toll road debt to stabilize too.
NPFG insures $11.2 billion of outstanding debt for 24 toll roads. The company’s biggest insured toll-road credits by revenue are the Illinois State Toll Highway Authority and the New Jersey Turnpike Authority.
The last two years have been scary for toll road investors.
Motorists traveled 2.925 trillion miles on American roads in 2008, according to the Federal Highway Administration, a 3.4% plunge from 2007. Miles traveled for 2009 through November, which is the most recent FHA data available, represented a slight increase over 2008 and a decrease from 2007.
Issuers typically borrow money in the bond market for toll roads and pledge to collect tolls from drivers who use the road. The toll revenue serves as the source of repayment for bondholders.
The primary credit determinant is thus how much people drive on toll roads. Most toll roads need an increase in revenue over time to generate enough cash to repay interest and principal on their bonds.
For instance, the New Jersey Turnpike Authority, which operates the Turnpike as well as the Garden State Parkway, needs a 4.6% growth rate in revenue over the long term to pay maximum annual debt service, according to the NPFG study.
The authority’s toll revenue grew at an annual rate of 1.7% through the three years leading up to 2008.
That is an extreme example. NPFG said the average toll road needs a 1.5% growth rate, and has seen a 3.2% growth rate over the three years ending 2008. In assessing the trend of how often people travel and pony up tolls, NPFG urged investors to pay less attention to gas prices and more to the economy.
While it is true that people began driving less when gas prices began mushrooming in the second half of 2007, the timing coincided with the onslaught of the recession.
NPFG pointed out that traffic continued to dwindle even after gas prices fell sharply in late 2008, probably because the recession was raging.
As gross domestic product continues to ascend from its nadir in mid-2009, the insurer expects toll revenue to continue growing, or for some roads resume growth.
It is possible a sustained elevation in gas prices might shift driver behavior, NPFG said, but for now toll roads’ correlation with the economy is much stronger than the correlation with fuel prices.
This is because, as a product, driving on a highway is “inelastic” — meaning demand does not decline much when costs go up. People need to drive to get to work or deliver goods by truck or take their kids to school, for example.
The economy determines whether they need to drive. Once that determination is established, costs will rarely deter drivers.
That is not to say investors should throw money at highway authorities and let price inelasticity do all the work for them. NPFG encourages investors to learn about the highways they have invested in.
This entails recognizing seasonal patterns, whether highways are used more for commuting or commercial delivery, and whether drivers recoil from toll hikes.
For example, traffic on the Maine Turnpike Authority’s 109-mile highway often peaks in August, while traffic on the Florida Department of Transportation’s Alligator Alley roadway crests in March.
There is also a big disparity between new and old roads, NPFG found, with roads built in the last 20 years carrying heavier debt burdens but operating with lower costs and collecting higher tolls from drivers.
Roads built since 1990 cost an average of about $35,000 less per mile to operate than roads built more than 20 years ago. Drivers are also paying on average 19 cents more per mile to ride on them.