Image alt tag

Error!

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Fixed-Income Insights

When executed properly, these projects can provide much-needed congestion relief to overcrowded roads.

(Note: This article is from the latest edition of  The Muni Quarterly.)

After a decade-long dry spell in new projects, the end of the Great Recession saw a strong jump in managed lanes across the United States. At Lord Abbett, our municipal bond team has been closely watching this expansion, and expects more of these projects coming down the road. In this article, we explain what a managed lane is and why these projects are becoming more prevalent, and we highlight some of the common factors we consider when investing in this new type of U.S. transportation.

With a strong U.S. economy and low fuel prices, high traffic congestion is spurring the growth of managed lanes.  A managed lane is an express lane running alongside a commuter road that allows customers to bypass typical congestion by paying a toll charge. That toll charge can vary by demand on the road. Some express lane-tolling systems are designed to maintain a constant speed on the lanes, and they alter the rates formulaically to achieve that speed. As more drivers use the lane, the higher the rate climbs.  Other systems can vary tolls simply by time of day with higher-trafficked times garnering a higher-use charge.  Open road (tag toll) or toll-by-plate technologies typically are employed by these tolling systems.

Managed lanes are becoming more prominent in areas of the country where dense populations have resulted in heavy traffic congestion. These include the metropolitan statistical areas of Washington, D.C.; Denver, Colorado; Miami, Florida; and Orange County, California, among others. Following the 1995 opening of State Route 91 in Southern California (the first U.S. managed lane), the United States didn’t see another new managed lane open until 2008.  U.S. managed-lane projects have since exploded, with more than 30 projects opening since 2008.  Some projects are being operated as public-private partnerships (P3s), such as Interstate 495 outside of Washington, D.C., while others are components of larger public transportation and tolling authorities, such as the Florida Department of Transportation’s Interstate 95 express lanes in Miami.  Despite a slow start, it’s clear that the municipal-bond market is seeing an increase in managed-lane projects, and we believe this is creating investment opportunities in the sector.  

Initially, as managed-lane projects approached the bond market for financing, politicians and credit analysts were somewhat hesitant to jump on board. Compared with a traditional toll road, managed-lane prices can vary depending on demand and, at times, can escalate to extreme rates that make for sensational media headlines and unwanted political interest from opponents of the projects. In addition, managed lanes compete directly with general-purpose lanes (i.e., non-tolled), giving customers a free alternative. Some managed-lane projects have even come with the requirement to expand the general-purpose lanes or allow car pools (cars with two or more occupants) to travel for free on the roads. With a large number of managed-lanes projects in the early stages of construction and operation, financial data can be limited, forcing investors to rely on projections.

However, the traffic and revenue data that do exist from newly opened projects have been exceeding projections and have driven more interest in the sector from both investors and transportation agencies. For example, following the successful opening of the I-495 and I-95 express lanes, developer Transurban struck a new deal with bondholders and the Virginia Department of Transportation to expand the I-95 express lanes to Interstate 395 outside of Washington, D.C., which is now under construction. When executed properly, these projects can provide much-needed congestion relief to overcrowded roads and, at the same time, offer the potential to generate a reasonable return for investors over the long term. In addition to revenue generation and congestion relief, managed lane operators also are pointing to the environmental benefits of limiting greenhouse gas emissions caused by stop-and-go traffic.

When reviewing managed-lane deals, investors should assess the ability of the project to cover operating expenses, maintenance expenses, and, most important, debt service over the life of the bonds. The main factors we analyze in new managed-lanes deals (especially stand-alone P3s, which lack the revenue diversity of larger toll systems) include: demand risk, construction risk, forecasting risk, and political risk.

  • Demand risk encompasses an expectation of the service area and how much use the toll lanes will get over the life of the project.
  • Construction risk is lower in managed-lane projects compared to green-field projects (e.g., cutting trees to open a new road), but still poses a threat, as construction typically involves the conversion of a high-occupancy vehicle (HOV) lane or empty medians to a road.
  • Forecasting risk is an issue, because the sample size of fully operating U.S. lanes is limited, and the new projects are opening up within the overall environment of an exceptionally strong U.S. economy—leaving unanswered, for now, questions of how new deals will fare during recessionary periods.
  • Political risk also must be considered, as the project needs to have the support of local government as well as the community.

Recently, managed-lane bonds have garnered investment-grade ratings based on strong support from local government agencies via grants or contributions.  However, many of these bonds will have to demonstrate creditworthiness through traffic ramp-up (i.e., gradual utilization increase from opening as customers adjust).  We will continue to follow the sector and assess value as these new deals and future deals make their transition from construction to operation.

 

IMPORTANT INFORMATION

This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice, and should not be used as the basis for any investment decision. This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be profitable.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

A Note about Risk: The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems.

The credit quality of the securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor's, Moody's, or Fitch, as an indication of an issuer's creditworthiness. Ratings range from 'AAA' (highest) to 'D' (lowest). Bonds rated 'BBB' or above are considered investment grade. Credit ratings 'BB' and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer's ability to pay interest and principle on these securities.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

 

RELATED TOPICS

About The Author

THE MUNI QUARTERLY

video
The Second Quarter 2018 edition offers insights from our analysts on key topics for municipal bond investors, along with essential market information.

First Quarter 2018 edition

image

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field