(Bloomberg) — Americans eager to get out of the house are hopping in their cars for trips near and far, fueling a faster-than-expected recovery in traffic and investor demand for bonds that fund municipal toll roads, bridges and tunnels.
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Many not-for-profit toll operators are seeing traffic around 90% to 100% of activity in 2019, following a smaller decline and stronger-than-expected recovery, said S&P Global Ratings Analyst Scott Shad. While volume this year will generally fall short of 2019 rates, it is likely to recover to pre-pandemic levels in 2022 and grow 5% in 2023, given an improving economy and pent-up consumer demand, Shad said.
Such numbers are attracting the attention of investors seeking higher yields in muni bonds at a time when yields are low and record federal support has boosted nearly all issuers. According to data collected by Bloomberg, debt issuance for state and local toll roads, bridges and tunnels has reached about $9.77 billion, the highest for the period so far since 2017.
The combination of aid and market engineering has made it “very difficult to tell the good from the bad,” said Mathew Kiselak, head of long-term municipal portfolio management for Vanguard, which owns $222 billion in muni assets. Toll roads stand out as attractive investments, he said.
“It’s really looking at subsectors that are benefiting from an improving economy,” Kiselak said in an interview. “We like toll roads.”
A North Texas Tollway System bond maturing in 2048 is one of the debts held in funds managed by Kiselak. In January, a 55 basis point premium for benchmark securities fell to a discount of 36 basis points earlier this month. The spread over the benchmark for debt issued by the Pennsylvania Turnpike Commission maturing in 2027, another Vanguard holding company, narrowed this month to 23 basis points from 49 basis points in May.
Part of the industry’s strength comes from the fact that Americans are choosing to take to the road rather than fly, Kiselak said. Total vehicle miles traveled in the U.S. is close to pre-pandemic levels, based on a weekly report from the U.S. Department of Transportation comparing current highway traffic to the same week in 2019.
Separating the mileage data between commercial and passenger shows that truck volume helped spark the uptick in mid-2020, as shoppers jumped online for purchases and the delivery industry boomed. Passenger traffic started to pick up more in the new year and is now close to pre-pandemic levels, according to government data.
In fact, issuers can often take their toll with inflation, giving investors some benefit from recent rising price levels. Increases in toll rates and other “prudent” controls have kept credit stable and meant no downgrades in 2020 or 2021 at 55 toll road operators rated by S&P. According to S&P, debt coverage “remained strong despite declines in revenues” in 2020.
This sector has “proven its worth,” Ed Paulinski, a portfolio manager and head of separately managed accounts at Goldman Sachs Asset Management, said in an interview.
“Many of the transport-related sectors have survived the downturn quite well and toll roads were certainly one of them,” said Paulinski. “Revenues were in line or in some cases better than pre-Covid. I think that combined with spreads is hard to find.”
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