One of the cornerstones of President Trump’s economic policy is the rebuilding of U.S. infrastructure, including airports, hospitals, roads and bridges, and water systems. The key to funding the infrastructure initiative would be investment tax credits intended to attract private investment for airports and roads that generate revenue for investors. The president’s proposal would provide incentives for more of the public-private (“P3”) infrastructure partnerships that are already taking place throughout the nation, such as airport and toll road P3 projects leveraging equity investments to construct new or replace aging facilities, as well as P3 projects used for the replacement of deteriorated bridges.
While investment tax credits from the federal government would provide another tool to leverage funds to improve U.S. infrastructure, state and local governments and their associated enterprise agencies are the organizations that already play a pivotal role in developing and managing U.S. infrastructure. Most infrastructure funding is also generated at the state and local level, either directly or with local matching to federal grants, and this includes revenues generated for P3 projects.
The issuance of municipal bonds has been the primary tool for state and local funding for transportation infrastructure, either through traditional project financing or as part of a P3 project. There are three municipal bond sectors backed on transportation related enterprises:
- Airports—bonds backed by airline and non-airline rentals, fees and charges levied by airports,
- Toll Roads—bonds backed by tolls and fees paid by motorists using toll roads, and
- Other Transportation Revenues—bonds backed by transit fare box revenues, seaport revenues, state and local fuel taxes, highway related fees and/or other non-airport and non-toll transportation revenues.
The SNWAM Investment Team maintains a stable outlook on each of the Transportation Sectors, and recommends a market weight allocation to them. Our outlook is based on strong demand for transportation facilities fueled by continued U.S. economic growth. Demand is reflected in 4.0% growth in North American (primarily U.S.) airline passengers through November 2016 and 3.0% growth in highway miles driven through November 2016 (following a record-breaking year in 2015). We expect growth in the utilization of transportation facilities to continue through 2017 as the president’s pro-growth initiatives should continue or increase the current levels of national economic growth.
We see better value in A and BBB rating category transportation bonds, particularly with Toll Road bonds. Those bonds are typically backed by toll facilities with similar characteristics:
- Built within the last twenty years to provide congestion relief in thriving urban regions where job and wage growth exceed national averages,
- Transaction growth has stabilized after a ramp-up period and revenues continue to grow,
- Toll revenues are used solely for toll facilities (and not leveraged for other non-related transportation projects), and
- Leverage has been reduced by utilizing subordinated federal highway loans, and/or there is additional capital and operating support provided at the state level.
The SNWAM Investment Team will continue to monitor potential federal legislation used to implement the president’s infrastructure proposals, with a special focus on its potential impact on muni transportation bonds. We will also continue to look for opportunities to invest in municipal bonds that will benefit from the demand for transportation facilities.
Source: Airports Council International, SNWAM, U.S. Department of Transportation Federal Highway Administration