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

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.