Toll Roads Face Long Road to Recovery: Bad News for Funds Eyeing Infrastructure

Pension fund leaders looking to expand into infrastructure will want to steer clear of toll roads for the time being. The typically stable asset class could take a year or more to recover from the pandemic, according to S&P Global Ratings.

Traffic levels at global toll roads have fallen 40% to 85% since the coronavirus crisis and shelter-in-place policies ushered people indoors, spelling trouble for revenues from the typically stable asset class, analysts said.

Investor interest in alternatives is growing during uncertain market conditions. Infrastructure assets, of which toll roads are a subset, amount to about 4.5% of investor portfolios, according to a Preqin survey. But about 77% of investors in each asset class have said they intend to maintain or increase capital investments into alternatives. And about 87% of respondents said infrastructure returns met or exceeded expectations.

A number of pension funds have made investments into toll roads, notably Canadian institutional investors. The Canada Pension Plan Investment Board (CPPIB), which has several sizable stakes in Toronto toll roads, made its first Indonesian toll road investment last year. Promises of a growing economy have spurred some investors to look into toll roads in emerging markets.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

That may have all changed now, particularly in places where the strictest measures were taken to curb the spread of the pandemic. Countries such as France, Italy, and Spain saw traffic levels at toll roads drop 80% to 85% almost overnight, the S&P report said. Over the past several months, other countries like India and China lifted tolls during the height of the pandemic.

Toll roads in the US saw similar drops, particularly at dense, interurban highways that carried commuters to bustling metropolitan centers. The New Jersey Turnpike Authority reported that April was down 61.5% in traffic and 61.6% in revenue compared with the same time last year.

Questions also remain for toll operators that do not have the liquidity or capital structure to absorb future shocks and losses in revenue if the economy does not make a speedy recovery—or if a resurgence in the COVID-19 disease means a return to mandated lockdowns.

For example, the project-financed Canadian 407 International toll road reported a 75% drop in traffic in April and is projected to lose 35% in 2020, but it retained its rating because of a C$1.5 billion cash cushion to cover future operating costs.

Meanwhile, the Pennsylvania Turnpike Authority, a not-for-profit toll road, reported that its cumulative traffic volume declined by half and expects about a $400 million to $500 million drop in revenue this year.

Other considerations, such as job losses and an increasing interest in sustained remote work, weigh on the future of the asset class.

The Untapped Potential of Infrastructure Investments’ Influence on Humanity

Los Angeles Explores Direct Infrastructure Investment Strategy for Local Projects

Tags: Coronavirus, COVID-19, critical infrastructure, Economy, Infrastructure, payment, road, toll, Toll Roads

UK trade association the Pensions and Lifetime Savings Association (PLSA) said it is concerned that a bill intended to improve the ability of companies to restructure efficiently and provide COVID-19 relief will have “unintended negative consequences” for the pension industry.

The PLSA said the Corporate Insolvency and Governance Bill allows for the possibility of bank lenders to be “higher up the pecking order” than employees’ pensions when it comes to recovering cash from a company that becomes insolvent.

The bill, which was introduced in May, would implement landmark measures to improve the ability of companies to be efficiently restructured, reinvigorate UK rescue culture, and support the UK’s economic recovery. It also includes temporary measures to ease pressure caused by the COVID-19 pandemic.

The PLSA said it has written to Paul Scully, the Business, Energy, and Industrial Strategy (BEIS) Parliamentary undersecretary of state, saying it believes some small, but significant, amendments to the wording of the bill could rectify the problem without compromising the intentions of the bill.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Under current rules, debts owed to a defined benefit pension plan, as unsecured creditors, are paid out after secured creditors in an insolvency situation, unless the plan has a form of contingent security. When a plan sponsor becomes insolvent, the majority of the deficit will often remain unpaid, and the UK’s Pension Protection Fund (PPF) will take responsibility for paying out plan members’ compensation.

However, the PLSA said the bill’s proposal for a new company moratorium that allows up to 40 business days of protection from legal processes against a company will make recovering unpaid pension contributions even more difficult than it already is.

“We and our members fully appreciate the need for emergency protective measures to help companies survive the unprecedented business disruptions from COVID-19,” Nigel Peaple, PLSA’s director of policy and research, said in a statement. “However, the new proposals will have unintended—but very serious—consequences for underfunded pension schemes where the employer becomes insolvent, as well as for the Pension Protection Fund.”

The changes that the PLSA says should be made to the bill include:

Limiting the bank debts that gain “super priority” to those that become due and payable on a non-accelerated basis during the moratorium;
Narrowing the definition of financial arrangements that gain super priority so that it only covers the bank debts and does not extend to all financial arrangements and lending; and
Amending legislation to provide for a Pension Protection Fund assessment period to be triggered when a company enters a moratorium.

Peaple said that if the bill isn’t amended, it “will have the effect of reducing the protection and rights of defined benefit schemes and the Pension Protection Fund where companies are in financial distress.”