LOS ANGELES -- Moody's Investors Service this week issued general credit criteria it will use to evaluate start-up toll roads.
Most projects will be unlikely to reach investment-grade levels at the outset, Moody's said in a nine-page commentary. Attaining Baa or higher ratings can be difficult, "given the hurdles that new toll roads must overcome." the agency said.
Moody's has held preliminary rating discussions with most of the start-up toll facilities proposed in recent years. Only one issue -- senior lien revenue bonds for a Harris County. Tex.. toll road -- was assigned an investment-grade rating during construction.
Nevertheless, Moody's said some projects could reach investment-grade levels "as speculative elements are reduced over time."
For example, as a road develops an operating history, its revenue forecasts will have a track record.
The scarcity of investment-grade ratings "reflects the inadequate bondholder protections typically provided by start-up toll revenue bond offerings." Moody's said.
Moody's pointed to one clear trend: "It is certain that more transportation agencies will issue toll road revenue bonds over the near term" because of limited public funding elsewhere, congestion on existing roadways, and deferred maintenance and safety concerns.
In response, Moody's said it expects to provide information to issuers and investors through either ratings or analysis.
"The sheer size, risk. and market interest associated with start-up facilities" help underscore that analytical role, the commentary says.
The commentary being released this week was designed to be "fairly comprehensive" so issuers and investors "can get a pretty solid idea of what we're looking for," Diane J. Schenkman, a vice president at Mood's, said yesterday.
Four general criteria -- economic feasibility and political, construction, project risk -- are used by Moody's to analyze the creditworthiness of start-up toll revenue bonds.
In one sense toll projects resemble other enterprise systems reliant on self-supporting fees or charges, so the analytic approach "is fundamentally the same as that used for other revenue bonds." Moody's said.
But toll roads also possess unique credit characteristics that require specialized examination, the agency said.
Debt financings for stand-alone toll facilities virtually disappeared following several well-publicized defaults in the 1960s, Moody's said.
In recent years, however, such projects have made a comeback, with five proposed toll projects in construction or under study in California alone, Moody's said.
One important distinction to consider is whether a road will be used as a vital transportation link that has no viable alternatives or whether it will relieve congestion on existing roads.
The New Jersey Garden State Parkway is an example of a vital link with limited competition, Moody's said. By contrast. "many roadways that have been proposed recently are intended to relieve congestion along an existing corridor."
History has proved, however. that "facilities with directly competing roadways are the most vulnerable toll ways" and require strict scrutiny of projected demand, Moody's warned.
The rating agency said "there have been a number of cases of inaccurate demand assumptions leading to optimistic revenue projections which never materialized." a concern that has been echoed by other market participants as well.
Moody's commentary also examines numerous other factors, including debt structure concerns that can arise when rate covenants provide added protection for junior lien bonds.
The commentary also discusses possible ways to temper construction risk, and stresses the need to understand political risks that can affect investors' interests.
Moody's said additional start-up toll road criteria will be developed as financings with varied structures come to market, including those with security enhancements to bolster the toll revenue pledge.
