Toll 'managed lanes' bring greater credit risk

Link to article here.

Toll express lanes can get investment grade ratings but it will be tough - Moody's
May 13, 2013
Toll Road News

The New York investment rater Moody's says in a new report that toll express or managed lane projects can achieve investment grade ratings, but it will be tough. They call the service provided by toll express lanes (TELs) desirable but discretionary and hence difficult to forecast. TELs can be expected to have generally greater risks  than regular toll projects, the rater says.

In their favor TEL projects are generally located in corridors with an established and known traffic demand and performance. And while they cater to a minority of trips they should be able to reach their full potential quite quickly - appealing to those in a traffic stream with low tolerance for delays and unreliable trip times: "Ramp up could be faster due to location next to already existing lanes."

The report titled "Managed lanes are HOT! Unique risks and benefits versus traditional tolling" acknowledges that TELs are becoming the preferred way to deal with congestion on the most heavily trafficked urban routes because:
- they can often be built within an established right of way
- construction may be simpler than new roads
- they can be built more quickly
- they can mobilize some private capital
- they offer obvious benefits of more speedy reliable trips to users and also more subtle benefits to drivers remaining in the untolled lanes

Challenges include:
- the ready availability of a free alternative right alongside
- quite small diversion from congested free lanes to the toll lanes can improve flow and undercut demand for the toll lanes
- value of time saved which drives willingness to pay tends to vary greatly by time of day and with the business cycle
- forecasting of traffic and revenue is therefore"more complex" than for a straight toll project
- conflicts between congestion management concession requirements and profit maximization
- dynamic pricing and collections

Dealing at the margin
"The variable nature of pricing and the frequency of decision-making on the part of the user based on the free flow conditions of the adjoining general purpose lanes decreases the predictability of traffic and revenue for these projects. Because tolls will rise as traffic increases, and fall as it decreases, we expect in general managed lane projects to exhibit a higher degree of revenue volatility compared to traditional toll roads. Since managed lanes serve as congestion relievers, demand is likely to rise and fall disproportionately to increases in traffic on the project corridor as a whole."

Plus the Moody's writers claim - without much explanation - that there are difficulties reconciling congestion management goals and profit maximization.

Despite all these difficulties they say that toll express lanes projects can achieve solid debt ratings. But to do this they'll need more equity and more liquidity to buffer them against sub-forecast results.

"(W)e expect projections to be less predictive of user patterns especially at the outset of the operations of a managed lanes project. Forecasted traffic capture rates for managed lanes should be lower than that for traditional roads and we expect these will also be less predictable short and long term, given that diversion of users to the tolled lane immediately frees up capacity in the non-tolled lanes and decreases the incentive for more users. Essentially, the users of the tolled facility are benefiting both themselves – with more predictable travel times and speeds – and those in the non-tolled lanes who may be less willing to pay for that certainty. Until we have a larger sample of these types of tolled facilities in operation, we will apply more conservative traffic capture rate assumptions for managed lanes than for traditional toll roads."

Small proportion of total traffic
They note that the pioneering 91 Express Lanes (91EL) have 11.7% of total daily traffic (2012) and that some new TEL projects have higher forecasts of share or 'capture rate.'  North Tarrant Express and the LBJ 635 lanes in the Dallas Ft Worth area have their financing structured to allow them to withstand shortfalls of 65% and 50% on forecast, Moody's report says.

Moody's report claims that the more the entry and exit points the greater the likely volatility of traffic. The original 91EL is the simple 'pipe' with no intermediate entries and exits at all in 10 miles, 16km, whereas the most recently opened 495EL on the DC area's Capital Beltway have about ten access/egress points in about 12 miles, 20km.

"A managed lane facility that has no exits and is point-to-point will attract users willing to make a decision for a whole trip segment, which likely will establish a more consistent and predictable traffic base.


Transurban and Fluor the developers and investors in the 495ELs added a bunch of direct connector entries and exits to the state's plan - on the grounds that many Beltway trips are short, and that they could tailor entries to the major employment center of Tysons with custom designed direct connections. In those ways they believed they could serve a much larger market share than using a 'pipe' configuration.

The Moody's report discusses other models in which TEL traffic and revenue risk is spread over other toll operations. In the Houston area Harris County Toll Road Authority developed the I-10 Katy TELs issuing debt bonded to its established network of full tollroads. 83 miles of new TELs are being created out of HOV lanes by the local transit agency, although they will be operated by HCTRA. 

In the Miami FL area 95ELs are also secured by the overall operations of Florida's Turnpike.

Negative on 495ELs
The Moody's report stresses the VA495ELs as "well below" the first year's target:

 "We believe that the underperformance of the HOT lanes reflects soft economic conditions in the service area, which results in motorists being unwilling to pay a toll for time savings. The original traffic study was done before 2008, and projections may not be achievable given that they did not consider the impact of the economic recession. 

"As the economy improves, we expect usage of the HOT lanes to increase to the extent that users place a higher value on time savings and congestion on the general-purpose lanes worsens. However, achieving the revenue growth rate required to meet the base-case expectation on which revenue to Transurban was based will be challenging."

Authors are Laura Barrientos and Maria Matesanz.
Link to article here.

Moody's: Tolled Managed Lanes Carry Unique Credit Risks Compared to Traditional Toll Roads

Highway planners in the US are looking at tolled managed lanes as a way to increase capacity or throughput on existing heavily congested roads
Created: May 13, 2013

Toll managed lanes have risk profiles different from toll roads because their operating histories are more limited, their dynamic tolling systems are challenging to execute, and traffic volumes on the lanes are likely to be very volatile, says Moody’s Investors Service in the report “Managed lanes are HOT! Unique risks and benefits versus traditional tolling.”

“Notwithstanding the difficulties of forecasting traffic and revenue for these projects, we believe managed lane projects are capable of achieving investment-grade ratings, even in the construction phase,” says Maria Matesanz, a Moody’s senior vice president. “However, we expect these types of projects to carry lower ratings than those of a traditional toll road project in the same service area or corridor.”

Highway planners in the U.S. are looking more and more at tolled managed lanes as a way to increase capacity or throughput on existing heavily congested roads, says Moody’s. Adding managed lanes or converting existing High Occupancy Vehicle (HOV) lanes to High Occupancy Tolled Lanes (HOT) provides state and local governments and toll agencies with an option for increasing capacity at relatively low costs because the lane may be able to use existing rights-of-way (ROW).

Financing a HOT lane project as a concession is also a public-private sector alternative to using limited tax sources to fund growing transportation infrastructure needs, says Moody’s.
These projects, however, introduce several unique credit considerations.

First, managed lane projects have a very limited operational history. Hence there is little operating data available to help guide forecasters on the possible demand scenarios for what is really a highly discretionary, but desirable, service.

Second, the dynamic tolling regimes and violation tracking systems for managed toll lanes are inherently more complex than those along a typical toll road because they potentially can change toll rates as often as every five minutes in response to traffic conditions. Therefore, there is greater risk these systems will not work as planned.

Third, these projects will likely exhibit more volatility in their revenues than traditional toll roads. Toll rates for managed lanes will generally rise as traffic increases and fall as traffic decreases.

“One way to mitigate the effects of the potential revenue volatility in relation to traditional tolled projects is through stronger liquidity packages, greater debt service coverage margins, and larger debt service and other reserves,” says Laura Barrientos, Moody’s Vice President and Senior Credit Officer, a co-author of the report.