Mature toll roads have historically been at the stable end of the transport infrastructure asset spectrum. Traffic numbers in most countries have been resilient over the years, with toll roads typically supported by long-term frameworks, often indexed-to-inflation. The pandemic upended that stability, with global traffic and revenues tumbling around the world. S&P Global Ratings expects global toll roads may need 12 months to recover, or longer in some instances, and that a significant number of entities will come out of the crisis with diminished operations and ratings.

After governments worldwide imposed community lockdowns to manage the spread of the virus, traffic levels on global toll roads dropped 40%-85%. Traffic levels fell by as much as 80%-85% over several weeks in Italy, Spain, and France with the governments in those countries mandating particularly strict measures. Many toll roads in the U.S. saw similar declines depending on the market and predominant user base. In some countries, as authorities relax lockdowns, there have been signs of traffic recovery.

A sizable portion of general travel largely ceased as communities abided by lockdown or stay-at-home directives. Similarly, discretionary travel dropped dramatically.

The slide in traffic has varied according to the nature of the toll road. The factors relevant to the drop in traffic include:

• Extent of the lockdown mandated by the relevant government.
• Location--urban versus interurban or regional, the presence of alternative free roads.
• Nature of travel--commuter, commercial, discretionary, or leisure.
• Type of road--motorway, bridge systems, or single-point bridge or tunnel.
• Whether authorities lifted tolls on roads for a period.
• Business model--e.g. not for profit, or long-term concession with alternate toll schemes, such as managed lanes, availability payment, and shadow toll roads (where governments pay private firms to operate a road).

Traffic levels during lockdowns have exhibited similar patterns across countries. China results differ as COVID-19 affected the country earliest and authorities implemented a national toll-free policy for a time (see chart 1 and "How Can China's Highway Operators Survive The Toll Moratorium?" published March 16, 2020 on Ratings Direct).

Chart 1

COVID-19 and the associated lockdowns have most heavily hit traffic numbers for light or passenger vehicles. Heavy vehicle traffic (typically commercial vehicles) has been more resilient owing to the continued need to move critical supplies of food, medicine, and to support the businesses that have carried on through lockdowns.

This was apparent for long-distance heavy vehicle traffic which fell less than intra-city travel. Heavy vehicle traffic on toll roads has fallen 10%-25% from pre-COVID levels. The level varies depending on the nature of the particular road and whether it services business activity.

Some government authorities lifted tolls at the height of the pandemic, to give relief to road users. Examples are the A25 and A30 in Montreal, which have temporarily lifted tolls, with the government committed to compensating the road operator. India and Peru have undertaken similar initiatives. In the U.S. some operators also waived tolls in March and April, while others temporarily stopped cash collection and expedited plans to convert to cashless tolling.

How Deep Is Your Lockdown?

There are no good precedents on which to estimate how toll road traffic may recover from COVID-19. Recent crises such as the 2003 outbreak of the respiratory disease known as SARS, and the 2009 global financial crisis are not directly comparable. SARS ended quickly and its spread was limited, and the global financial crisis did not greatly affect traffic numbers.

We base our estimates of post-COVID traffic recoveries on the degree of lockdown measures, and the extent to which the actions restricted the normal movement of people. The severity of such measures varies markedly among countries.

Our base cases will vary by region and by asset type but generally assume toll road traffic path has three potential phases of recovery:

• We assume that in the initial, more stringent lockdown phases, where movement is restricted mostly to essential activities, traffic drops by half from pre-COVID levels. This period will likely last about two months.
• We then assume that as lockdowns and restrictions of movement are progressively relaxed, traffic stabilizes at about one-quarter below pre-COVID levels. This period may last two to four months.
• Finally, traffic for many facilities will likely return to about its pre-COVID levels within at least 12 months with some regional and asset-specific variations.

From here we can estimate global toll road traffic for 2020 and 2021 calendar years, using 2019 as a baseline (see Table 1).

Table 1

Our expectation that toll road traffic will return to pre-COVID levels for most regions and assets in around 12 months is appreciably different from our estimates for airport passenger recovery rates where we believe the recovery in air travel will likely take more than three years. As mobility curbs are gradually eased, with China lifting some restrictions in February, followed by some European countries and Australia in May, light toll road traffic began to rebound.

This reflects the nature of toll road traffic. It's an often essential mode of daily transit, and far less discretionary than air travel. Cars also provide a restricted, enclosed space for those who wish to adhere to social distancing rules.

Our toll road traffic performance assumptions for the toll roads are generalizations. We expect to see variations against this baseline across issuers and geographies. Urban toll roads used by commuter passengers should bounce back more quickly than interurban and regional toll roads, though there could be lags if remote working continues.

Conversely, toll roads that have free road alternative choices may experience slower recoveries, until the free roads are heavily utilized.

Toll roads that experienced larger drops in heavy traffic are probably more dependent on industrial activities. For those, the traffic recovery may depend on the pace of the economic recovery post-recession.

How Tolled Traffic Has Fared Under COVID--A Global View

While the trends for traffic performance since the onset of COVID-19 are relatively consistent, there have been regional differences. A summary for major areas is set out below.

EMEA 

European toll road network operators were among the first to witness severe declines in traffic as Europe after infections surged in early 2020, starting in Italy. While rated toll road operators with sizable portfolios are among the largest players globally (VINCI S.A., Abertis Infraestructuras S.A., Atlantia SpA), we also rate a number of single-asset corporate and project financed toll roads.

Table 2

Rating actions ranged from outlook revisions to affirmations, with one project downgraded by one notch and the ratings on another project placed on CreditWatch with negative implications. The effect depends primarily on ratio headroom and financial flexibility. For instance, French toll roads have strong balance sheets, while Spanish and Italian assets entered the crisis with tight ratings headroom due to past acquisitions and regulatory disputes.

Some firms have a diversity of earnings and assets. This may partly mitigate the effect of the pandemic as authorities ease restrictions at different rates in different countries. Projects' remuneration mechanisms also affect the credit hit from the outbreak. For example, shadow toll roads will be relatively more resilient, as will assets with protected cash flows, such as traffic guarantees.

We assume 15%-30% decline in light vehicle traffic for 2020 followed by full recovery to 2019 levels within one or two years across EMEA, depending on the road's rationale and traffic pattern. Traffic tends to come back quickly, with volumes in Italy, Spain, and France recovering to 30%-50% year-on-year in the most recent weeks. Operators' immediate performance will largely depend on people's ability to travel across borders during the summer season, if quarantine restrictions are still in place. Leisure traffic might benefit from the switch from international to domestic holidays.

While truck traffic has been resilient during the lockdown months, it is more sensitive to weakness in the eurozone economy, which we assume will shrink 7.3% in 2020. As a reference point, it took several years for heavy traffic to recover after the European sovereign debt crisis, which peaked between 2010 and 2012.

EBITDA levels for pure European toll road network operators will likely decline in 2020 in proportion with the traffic decline, given high fixed-cost bases. The scope for operating cost savings is limited to furlough costs, and variable royalties and local taxes.

The scope for cost cutting is more constrained than in previous downturns. For example, during the global financial crisis, toll road operators raised profit margins by introducing e-tolling and automation, and by consolidating numerous acquisitions.

Operators can manage their cash burn during this downturn by deferring capital expenditure, cancelling dividends, or pulling back acquisitions. For instance, VINCI will most likely not pay an assumed dividend of €1.8 billion in 2020, and Abertis Infraestructuras said the remaining half of its dividend is contingent on maintaining our rating on the entity.

Overall liquidity should remain at least adequate for most rated toll road network operators. Their toll road projects will likely be able to absorb the shock of the outbreak on account of their sizable liquidity balances. Most of these issuers refinanced some of their maturities earlier in the year, or issued debt for other corporate purposes, reinforcing their liquidity positions.

North America 

The U.S. toll sector is small relative to the untolled interstate system of regional roadways. According to the International Bridge, Tunnel and Turnpike Association, 128 entities in 34 states operate 342 toll facilities in the U.S. These are responsible for about 10,100 of centerline kilometers in urban and rural areas, generating US$20 billion in annual toll revenues.

This distance is a small share of the 76,500 kilometers of the Interstate Highway System and an even smaller part of the 290,000 kilometers in the National Highway System. Measured by distance, about 60% of the tolled roads, bridges, and tunnels in the U.S. are on the interstate system. Similarly, in Canada, the tolled facilities represent just a fraction of the total road network.

Given the diverse grouping of North American toll operators, the outbreak's effect on traffic has varied, but all have experienced significant revenue declines. Interurban roads in larger metropolitan regions took the biggest hits, with commuter traffic sliding 40%-80%

In April 2020, across our project finance portfolio, the larger declines were observed on congestion relieving roads, such as managed lanes in the U.S. and 407 International Inc. in Canada. Freight and heavy vehicle traffic has mostly remained resilient but saw a decline of close to 20% on some heavy freight corridors, such as the Indiana East–West Toll Road.

As restrictions on economic and social activities gradually ease in North America, mobility is on the rise. Traffic is recovering, albeit from severely depressed levels. Our base-case traffic forecast assumes a commuter traffic decline of 20%-45% in 2020 and freight traffic drop of 5%-20% in the same year. This should be followed by a full recovery to 2019 levels or our previous base case levels within one or two years. The exact recovery will depend on a road's location, traffic patterns, the economy, and social demographics.

Across the U.S., traffic declines for not-for-profit toll operators were similarly large. The Pennsylvania Turnpike Authority, which carries about 14% of commercial truck traffic measured by transactions and generates about 44% of gross toll revenues saw its cumulative traffic volume decline by half. The entity is projecting a US$400 million-US$500 million drop in revenue this year.

The McAllen–Hidalgo–Reynosa International Bridge between Texas and Mexico saw traffic plunge 80% in April and by two-thirds in May compared to 2019 levels. The New Jersey Turnpike Authority reported that April was down 61.5% in traffic and 61.6% in revenue, again compared to 2019. To benchmark and evaluate management-provided forecasts against our criteria and financial metrics, we have developed a range of traffic estimates as a starting point for reviewing management estimates (see "Activity Estimates For U.S Transportation Infrastructure Show Public Transit And Airports Most Vulnerable To Near-Term Rating Pressure," published June 5, 2020 on Ratings Direct).

For U.S. nonprofit toll operators, our activity estimates consider our economists' April 2020 baseline and downside views. Here we gauge the severity and duration of the COVID-19 pandemic and associated effects on demand for transportation (see "Economic Research: An Already Historic U.S. Downturn Now Looks Even Worse," April 16, 2020).

We assume the current recession will reduce economic activity in the U.S. by 11.8% peak-to-trough. By way of comparison, this is roughly three times the decline seen during the Great Recession, in one-third the time.

A gradual recovery will likely be underway in the third quarter this year--not before--as fears linger and social distancing endures. The April 2020 downside forecast assumes an even steeper contraction in consumer spending with a peak-to-trough decline of 13.7% and a much longer timeline to bring COVID-19 under control than in the baseline. This would delay the start of the recovery in spending, reduce its vigor, and delay laid-off workers' return to jobs, with unemployment peaking at the mid-teen percentages in May 2020.

For project finance concessions, rating actions during the crisis have varied, depending on how well a given project can handle significantly reduced traffic. Mitigants include robust debt service coverage, hybrid revenue streams (availability payments with some traffic risk), capital structure, and significant liquidity reserves.

For example, despite traffic declines of more than 75% in April and our estimate of traffic decline of 35% for 2020, we affirmed the rating on 407 International. This affirmation considered its cash flow cushion in 2020 against our minimum requirement at the rating. More important was its cash balance of C$1.5 billion, which alone can cover its operating expenses and debt service obligations for the next two years. The issuer also has one year of debt service reserve. All these factors combined largely address the possibility of a traffic decline beyond our estimates.

Similarly, the revenue exposure to toll paying customers of Nouvelle Autoroute 30, also known as the A30, is limited to 20% in 2020. The remaining 80% of revenue comes from reliable availability based payments which alone can cover full debt service obligations for the remainder of 2020.

Additionally, the absence of any material amortization over the next few years has also supported ratings through better debt service cover ratios, or has resulted in only one notch downgrade on our North American toll roads. Importantly, all project financed toll roads in North America have retained investment grade ratings.

Table 3

Latin America 

The COVID-19 pandemic resulted in drops in commuter traffic of close to half, and about 20% for heavy vehicles during April in Brazil. The hit was not uniform. It depended on the region where the asset is located, and the traffic mix. We estimate an average 15% traffic decline in 2020, with the second quarter taking the biggest hit (55% drop in light vehicle traffic, and a 15%-20% fall-off in heavy vehicles) and a slow recovery from July 2020.

Brazil's large toll-road operators have taken steps to preserve liquidity, such as postponing scheduled investments where possible, optimizing operational costs and maintenance capital expenditure, and postponing dividends. As a result, we affirmed the ratings on 16 toll road concessions in Brazil, reflecting their capacity to absorb a substantial traffic decline in 2020.

Table 4

The Mexican government has implemented harsher mobility restrictions compared with previous viral events such as the H1N1 virus (swine flu) outbreak in 2009. As such, in April 2020, light traffic on Mexican toll roads dropped 50%-70%, while heavy traffic fell 5%-30%. The suspension of industries such as the automotive and construction sectors hit some toll roads, as did restrictions at the U.S.-Mexico border. A very similar performance was likely in May, translating into a plunge in traffic for all of 2020.

The credit hit is not uniform across the road projects we rate in Mexico. The effect depends on asset-specific features (such as the competitive position of the project, traffic mix, location, exposure to commercial activities, etc.), and the financials, structure, and liquidity cushion of each specific project.

Subordinated debt is most exposed to the effects of COVID-19, as lock-up tests may be triggered. The projects with subordinated debt may receive lower distributions from senior debt as a result, and in some cases may use up their debt service reserves. We lowered the ratings on two transactions in Mexico because of this dynamic (see "Mexican Toll Roads Remain Vulnerable Amid COVID-19; Recovery Could Come Quickly As Restrictions Ease," May 26, 2020.)

We anticipate a quick rebound in light traffic as commuters resume normal daily activities. Some commuters will still choose toll roads for security reasons, even if the free roads are uncongested.

Chart 2

In Chile and Panama, where the traffic mix is mostly comprised of light vehicles, traffic slid by up to 80%, resulting in the downgrade of one project in Chile and two projects in Panama (fallen angels moving from investment grade to sub investment grade).

A combination of traffic decline and necessary maintenance works has severely hit the financial flexibility of toll roads in Panama. Traffic will likely recover slowly over the coming months in Panama. Most drivers have shifted to free alternative roads that operate parallel to the rated toll roads (such as Domingo Diaz Avenue), given the light traffic on the free roads, with no significant time savings gained from using the toll road.

Australia 

Australia's toll roads are largely in the major cities of Sydney, Melbourne, and Brisbane, providing key connections through and around urban areas. Transurban Group is Australia's major toll road operator with assets in all the key markets. Initial falls in traffic from mid-March, when lockdown arrangements were announced, were 35%-55%. Traffic dropped in subsequent weeks to 40%-60% of pre-COVID-19 traffic levels.

However, in early to mid-May, traffic began to show signs of recovery from late April lows. State governments announced partial relaxations of lockdown measures allowing some businesses to reopen, and for schools to fully open. More employees are commuting to offices. With restrictions on public transport passenger density, people will likely turn to cars.

While we affirmed the rating on Transurban Finance Co. Pty Ltd. (BBB+/Negative/--) and Transurban Queensland Finance Pty Ltd. (BBB/Negative/--) in early April, we placed the ratings on both issuers on negative outlook reflecting our uncertainty over traffic levels during 2020, the severity of the economic downturn, and the pace of recovery of traffic from COVID-19. Near-term liquidity for both issuers is adequate. Both issuers will likely take action, if necessary, to protect the current rating on them.

China 

China's toll roads are primarily highways, accounting for 3% of total road distance but about half of national road investment in recent years. China started its COVID-19-related lockdowns in late January. This dented highway traffic, which declined by about half during the 40-day Lunar New Year holiday period (extended to allow for lockdown measures).

The turning point came when Chinese authorities suspended toll collection at all highways for 80 days, starting Feb. 17, 2020. This was done to stimulate the national economy, which was hit hard by the outbreak. The gradual resumption of economic and social activities in China supported a strong traffic recovery in March and April, with average 15% growth over the same period in 2019. China's toll road traffic has been resilient even after toll collections resumed. Most of China's tolled highways have seen traffic levels revert to the same levels of last year.

However, Chinese toll road operators have suffered due to stringent lockdown measures in January and February, and because of the toll moratorium. Most reported large drops in revenue and net losses in the first quarter. We expect a 25%-30% decline in toll revenue for China's toll operators in 2020.

Despite large cash flow strains stemming from China's toll-free period, operators have managed their liquidity using cash on hand and bank credit. Given their status as state-owned enterprises that operate strategic assets, toll road companies generally have good access to credit markets in China.

Among our rated Chinese toll firms, Yuexiu Transport Infrastructure Ltd. (YXT: BBB-/Negative/--) faces more downward pressure because the rating buffer was thin coming into the crisis, owing to large debt-funded acquisitions in 2019. It also has a high volume of revenue coming from assets in Hubei, the original epicenter of China's COVID-19 outbreak.

Free Roads 

Use of free roads in the U.S. offers a view on toll road use in the States through the pandemic. In the U.S., total vehicle kilometers traveled at the county and state level have declined by 61%-90% following state government stay-at-home orders in response to the outbreak, according to data from Streetlight.com. The higher the number of reported COVID-19 cases, the fewer the vehicle kilometers traveled. This is significant for all states that experienced similar declines in fuel tax revenue collections predominantly used to fund road improvements.

More recent U.S. road data shows a pattern of traffic similar to that playing out on U.S. toll roads, but with a shallower drop during March and April, and some recovery in recent weeks as general activity has re-emerged in many U.S. states.

Chart 3

Of the rating actions we have taken on toll roads globally, 12 have been downgrades, we have placed seven ratings on CreditWatch with negative implications, and we have revised down the outlooks on 19 ratings (see table 5).

The credit hit of COVID-19 on toll roads is not uniform and depends upon factors such as leverage, rating headroom, liquidity, and operating margin.

Table 5

Will COVID Redefine Toll Roads?

The coming months may be critical to our ratings on global toll operators as outlooks and CreditWatches are resolved.

In addition to considering the depth of traffic drops and the rates of traffic recovery, we will be closely looking at what, if any, remedial action has been taken by issuers.

Some issuers have already taken steps to repair balance sheets and to address diminished credit ratios.

With generally high fixed costs, many toll roads will not have much flexibility to maintain operating margins as toll revenues decrease. While nonessential capital and maintenance expenditure can be deferred, the best positioned toll roads will be those that have strong liquidity and credit support mechanisms to see them through the worst of pandemic-induced traffic declines.

As the world emerges from COVID-19, it is likely that toll roads will experience changes in traffic patterns.

Especially for urban toll roads, the early months may see workers switch from public transport to motor vehicles for commuting. Such behavior could occur as people are reluctant to use trains and buses, and as governments regulate the number of passengers that can use public transport.

As an example, on May 18, 2020, the New South Wales government in Australia placed an initial restriction of 12 passengers per bus and 32 passengers per train carriage. This should result in a sharp immediate increase in motor vehicle traffic as people return to work and school.

But as more people and businesses become accustomed to working from home, this may ultimately reduce car traffic, or at least moderate traffic growth.

Longer term, the effects of a global recession may suppress toll road traffic growth for some years. Significant job losses and lower GDP have the potential to curb road usage. Further, less discretionary travel may also negatively affect non-peak periods and non-work days.

The coming 12 months will tell us a lot not only about the nature of individual toll roads but also about the nature of toll roads as an asset class.

Related Research

• Activity Estimates For U.S Transportation Infrastructure Show Public Transit And Airports Most Vulnerable To Near-Term Rating Pressure, June 4, 2020
• Mexican Toll Roads Remain Vulnerable Amid COVID-19; Recovery Could Come Quickly As Restrictions Ease, May 26, 2020
• S&P Global Ratings Webinar: COVID-19 Is Taking A Toll On EMEA Toll Road Ratings, April 22, 2020
• Various Rating Actions On Seven European Road Projects As COVID-19 Containment Measures Hit Traffic, April 17, 2020
• Coronavirus Travel Restrictions Cut Cash Flow Of U.S. And Canadian Project Financed Roads, April 14, 2020
• Transurban Queensland Outlook Revised To Negative Following COVID-19 Outbreak, Government Restrictions; Ratings Affirmed, April 9, 2020
• Transurban Finance Outlook Revised To Negative Following COVID-19 Outbreak, Government Restrictions; Ratings Affirmed, April 8, 2020
• Various Rating Actions Taken On Three Chilean Toll Roads On Expected Traffic Slump Due To COVID-19, April 6, 2020
• How Can China's Highway Operators Survive The Toll Moratorium?, March 16, 2020
• Yuexiu Transport Infrastructure Outlook Revised To Negative On Sharp Revenue Decline; 'BBB-' Rating Affirmed, Feb. 24, 2020
• Sudden Policy Change In China Hits Toll-Road Operators' Liquidity, Feb 18, 2020