Tracking the Transportation Sector during the Pandemic | Lord Abbett
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Fixed-Income Insights

A survey of how public transit systems, toll road operators, and airports are responding to the crisis.

Read time: 4 minutes

This article is from the Q2 2020 edition of The Muni Quarterly.

Within municipal markets, the transportation sector encompasses a wide range of activities, mainly public transit, toll roads and airports. As such, it was one of the sectors hardest hit by COVID-19. Given the essential nature of the services and strong government support, we believe each area of transportation is likely to recover, although not all at once.

Transit Operators Get Support from Governmental Subsidies

At the peak of the COVID-19 outbreak in April, the country’s largest transit system, New York’s Metropolitan Transportation Authority (MTA), saw subway and bus traffic down more than 90% from the prior year, as well as a large amount of employee infections.  Similar drops in traffic occurred across the country for other transit operators. Reduced ridership yielded sizable operating deficits and created questions over the long-term demand for transit in metropolitan areas.

Despite ongoing pressure, support from the State and Federal government keeps the MTA solvent.  All transit lines across the country are subsidized in some way by the local, state and federal government, as fares aren’t sufficient to cover the cost of operations.  It is typical for transit system bonds to be supported by sales tax revenues or other local taxes, which results in high credit ratings.  For example, Metropolitan Atlanta Rapid Transit Authority’s (MARTA) debt is backed by a pledge of a sales tax levied in the three surrounding counties, garnering the system an AA+ rating from Standard & Poor’s (S&P).   Washington Metropolitan Area Transit Authority (WMATA) finds support in payments from the District of Columbia, State of Virginia and Maryland, and recently priced a deal rated AA by S&P.  A variety of taxes and fees also support the MTA (A- by S&P). Although revenues backing these bonds have also come under pressure due to lower economic activity, they typically remain more than adequate to continue to cover the required debt service payments for their respective transit systems.

The federal government identified the need of transit systems across the country when it passed The CARES Act in March, allocating $25 billion for transit.  The disbursed funds helped stem operating deficits for transit operations.  Although issuers in this the sector have already experienced some pressure from ratings agencies, they continue to access the capital markets, as transit systems like the MTA and  WMATA recently issued bonds.  We believe it is likely that additional federal and state and funding will be received to prevent cuts to service.

 

Figure 1. Pandemic Derails Subway Ridership in New York City

Data for the period February 3, 2020–May 22, 2020

Source: New York Metropolitan Transportation Authority.

 

Toll Roads and COVID-19

As businesses and office buildings shuttered during the outbreak, traffic on the roads dwindled and so did revenue for municipal toll operators.  From March 8 through the end of April, the New York State Thruway Authority saw a 48% drop in traffic and 36% drop in revenue from the prior year.  For some roads, such as Ohio Turnpike, the New Jersey Turnpike and North Texas Toll Authority, traffic was down more than 50% during the month of April.  However, truck traffic didn’t see the same declines as passenger traffic due to the essential nature of services provided.  For the Pennsylvania Turnpike, where truck traffic represents 44% of revenues, volume for trucks fell only 25%, while passenger traffic decreased 67%.  In Ohio truck traffic declined only 13% while total traffic narrowed by 68%.  We are seeing some indication that traffic is again building as business and offices reopen across the country, following a similar path as seen in Asia.

For most toll operators, the revenue plunge during the first half of 2020 can be offset by strong liquidity cushions.  Per the last available fiscal audits, we found that over 60% of toll road operators had over a year’s worth of operating cash, with the average day’s cash calculation for our sample group of 75 borrowers at 527 days’ cash on hand.  Another offsetting strength for the sector is that most borrowers have full rate-setting authority to partially offset the drop in traffic. The New Jersey Turnpike passed a 36% increase in tolls in May 2020, with Governor Phil Murphy’s approval, while many other facilities have the fully ability to raise rates without legislative or state authorization.

Toll roads were not granted any funding as part of the CARES Act, but we believe they should be able to manage, given strong liquidity and what will likely be a quicker recovery than, say, airports and transit credits.  There are still some questions regarding the long-term impact of COVID-19, with many companies transitioning to work-from-home, but that challenges could be offset by increased car trips in lieu of flying.  There is also potential for additional funding down the road as infrastructure spending remains an important topic in Congress.

Airports’ Liquidity–and Federal Aid–Drive Resiliency

The pandemic substantially reduced U.S. air traffic, with throughput falling through March and remaining 95% below 2019 levels throughout all of April. Activity has since begun to pick up though travel is still 85% below last year’s levels as of the first week of June. International travel has been particularly hard hit due to restrictions on flights to and from the United States imposed by Washington and governments elsewhere.

 

Figure 2. Aisles of Empty Seats for U.S. Airlines during the Pandemic

Data for the period March 1, 2020–June 1, 2020

Source: U.S. Transportation Security Administration via www.tsa.gov.

 

It is assumed by many that airports receive revenues directly from passengers using the airport.

What is not widely understood is that it is the airlines themselves that pay landing fees and terminal rentals to operate at the airport; these payments support airport municipal bonds. The airlines have long-term fee agreements with airports; failure to pay would mean losing the ability to operate at a given airport. So although there is a slowdown in traffic now, it is hard to imagine a circumstance where airlines would abandon terminals in cities that have significant economic bases.

Airport resiliency will come largely from their strong liquidity position going into the pandemic. Based on a sample of the 55 largest airports in the country, average liquidity position was 601 days cash on hand with average unrestricted cash balance covering annual debt service by 4.6x. Additional relief came from the CARES act, with airports receiving $10 billion, allocated according to enplanements, debt service requirements and reserve levels. For the group of 55 airports, the average CARES Act grant was 1.5x debt service. Airports also benefit from a relatively high degree of flexibility when it comes to capital spending. Most capital projects are expansionary in nature and can be deferred in times when demand is depressed.

 

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.

References to specific securities and issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in portfolios managed by Lord Abbett and, if such securities are held, no representation is being made that such securities will continue to be held. 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.

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 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.

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