Since the COVID-19 outbreak began in Mexico, the government has enacted various mitigating measures intended to contain the outbreak, including social distancing and mobility restrictions that have severely affected the operations of the transportation sector.

In this context, S&P Global Ratings updated its base case for Mexican toll roads. Our current base case now considers a traffic decline of between 20% and 30% compared to 2019 levels, with a full recovery by 2021 but with sluggish growth after that because we expect modest economic growth in the country in 2021 and 2022. The depth of the traffic deterioration depends, in our view, on the characteristics of the assets, including their geographic locations, competitive position, and more importantly, vehicle mix, because those that have a higher proportion of heavy traffic would suffer less in the very short term.

Consequently, as of today we've revised our ratings on six Mexican toll roads, including mostly subordinated debt tranches that will experience tighter metrics due to fewer dividend distributions, based on our updated forecasts.

In our view, downside risks are still significant for this sector. A prolonged outbreak, a slower rebound in traffic than what we currently estimate, or even further pressure on the local economy could further challenge projects' credit qualities.

Steep Drop In Traffic, But Rebound Could Occur By Year-End

The Mexican government has implemented unprecedented mobility restrictions and social distancing measures--harsher compared with previous pandemic or epidemic events such as the H1N1 virus (swine flu) in 2009--to contain the rapid spread of the coronavirus in Mexico. Consequently, we expect traffic volume on Mexican toll roads to plunge during 2020.

In addition, economic growth is sharply slowing, leading us to now forecast a recession in the country this year with GDP falling 6%-7%. (see "Credit Conditions Emerging Markets: Longer Lockdowns, Heightened Risks", published on April 23, 2020). Moreover, we expect growth will moderate in the medium term.

As we anticipated, in April Mexican toll roads saw an overall slump in light traffic of between 50%-70%, depending on the characteristics of each toll road, and a drop in heavy traffic of between 5%-30%, because some toll roads were affected by the suspension of industries like the automotive and construction sectors, or by the restrictions at the U.S.-Mexico border. We expect a very similar performance in May.

Chart 1

Considering this new context, we updated our base-case projections for our portfolio of rated toll roads, which now assumes a decline in traffic between 20%-30% compared to 2019. Particularly, we expect the decrease to peak in May as mobility restrictions tightened and the coronavirus cases likely hit their peak. Moreover, we forecast the fall in heavy traffic to be less drastic than that of light traffic, which is supported so far by the toll roads' volumes in April. This difference between light and heavy traffic is mainly due to continued movement of goods and the maintenance of a basic level of economic activity.

Chart 2

Unlike airport traffic, we expect toll roads' traffic to rebound by the end of 2020 and to fully recover in 2021. We believe that mobility restrictions will be gradually lifted between June and September, consisting of a three-phase plan to lift the lockdown and resume activities by degree of essentiality. Additionally, we anticipate a quick rebound of light traffic as commuters resume normal daily activities, and we believe that for security reasons, toll roads will continue to have a better competitive position versus free roads, even if these are not saturated. The toll roads that had larger drops in heavy traffic in April are those that are more exposed to the automotive sector's trade with the U.S., which was suspended. In regards to light traffic, it experienced a similar drop over all the rated Mexican toll roads.

Chart 3

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Traffic Drop To Hit Subordinated Series Ratings Hardest

The credit impact of the traffic decline and the pandemic is not uniform across the road projects we rate. It depends on asset-specific features (such as competitive position, traffic mix, geographic location, exposure to commercial activities, and others), and each project's financials, structure, and liquidity cushion. However, we believe that the impact of COVID-19 will most affect subordinated series because lock-up tests may be triggered--consequently, those projects would receive lower distributions from senior debt, and in some cases would use their debt service reserve accounts.

In this context, we've taken various rating actions on Mexican toll roads; illustrated in Table 1:

Table 1

In our view, senior debt will be more resilient, even in this context, because these projects had higher coverage cushions to start, with average debt service coverage ratios above 1.60x; however, the situation is highly uncertain and fast-moving, and in our view, downside risks are still significant for all toll roads.

Table 2

Risks Remain, Depending On The Extent And Duration Of The Pandemic In Mexico

Given the uncertainty about the impact and length of the coronavirus outbreak in Mexico, we could take additional downgrades on toll roads if:

• The government extends lock-down measures if the outbreak's peak is not reached in May.
• Slower recovery of heavy vehicle traffic, which will be influenced by a weaker economic panorama in Mexico and the trade relations with the U.S., the country's main trading partner.
• A traffic drop of more than 10% from our current base-case scenario, which would translate to a decrease in total traffic of about 35% this year.