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Struggling Toll Roads Make for Good Investments

In another example of a struggling toll road attracting no shortage of investors, the poor revenue performance of the San Joaquin Hills Transportation Corridor Agency in Orange County, California has not dissuaded investors, as the returns are high.
October 30, 2014, 7am PDT | Irvin Dawid
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Bankruptcy be damned—toll roads pay well! With "historically low yields on ultrasafe government debt and municipal bonds," writes Aaron Kuriloff, "toll-road debt and other riskier types of fixed-income investments" have become tempting to investors in search of higher yields.

We last wrote about the private San Joaquin Hills Transportation Corridor Agency, part of Orange County's Transportation Corridor Agencies, in December 2012, when the state treasurer was "investigating whether the bondholders can be paid their interest." Their bonds had been downgraded to junk status.

Now we learn that on October 22, they "sold about $1.4 billion in bonds, capitalizing on a broad decline in yields that has whetted investors’ appetite for riskier bets," writes Kuriloff. Most of the debt was priced "to yield between 4% and 4.45%," writes Kuriloff, over double what one could expect from safer investments.

Proceeds will go toward refinancing bonds sold to build the highway, which opened in 1996 and runs between the cities of Newport Beach and San Juan Capistrano.

As with the Indiana Toll Road, purchased from the Hoosier State in 2006 and declared bankrupt last month, Kuriloff writes that "(m)any toll roads ran into trouble after the 2008 financial crisis, when revenues fell amid declines in traffic," adding that the toll agency "restructured its debt in 2011 and has hiked tolls every year since 2012 to appease existing bondholders, according to Moody’s Investors Service."

By contrast, publicly run toll roads typically do not raise tolls so frequently. For example, before the Indiana Toll Road was sold in 2006, it had not raised tolls since 1985.

And regardless of the financial state of toll roads, Kuriloff writes that they "are rebounding with the economy after the recession caused vehicle use to fall about 3% between 2007 and 2011, according to a report [PDF - see pg. 4] last week by Janney Capital Markets, which upgraded its outlook on the sector."

And with gasoline prices "tumbling to a 4-year low," that doesn't hurt either.

Correspondent's noteSubscriber-only content to Wall Street Journal articles will be available to non-subscribers for up to seven days after Oct. 27.

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Published on Wednesday, October 22, 2014 in The Wall Street Journal
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