Investors - NOVEMBER 30, 2018

Transportation infrastructure in 2019: a conversation with S&P Global Ratings

by Drew Campbell

Drew Campbell, i3 senior editor, spoke with S&P Global Ratings analysts about what 2019 may bring for transportation infrastructure globally.

Candela Macchi, director, Infrastructure, Latin America

Dhaval Shah, director, Infrastructure, North America

Julyana Yokota, director, Utilities & Infrastructure, Latin America

Richard Timbs, Senior Director, Infrastructure Sector Lead Pacific Region, S&P Global Ratings

Tania Tsoneva, director, Infrastructure & Utilities, EMEA, S&P Global Ratings


As we approach 2019, what is the outlook for the transportation infrastructure sector?

S&P: The outlook across all regions is mostly stable. And although the global economic slowdown may cool growth prospects, we do not envision a retraction in absolute revenues for transport operators. In fact, average EBITDA [Earnings before interest, tax, depreciation and amortization] margins across global transportation infrastructure assets holds at 30 percent in our forecast for 2019 and 2020: toward 20 percent in Western Europe, closer to 40 percent in North America and Asia-Pacific, and the average of 50 percent among the rated assets in Latin America.

Specifically, what is the outlook for the airport, road and port sectors?

S&P: We have seen airport traffic grow, on average, at approximately twice the rate of local GDP growth in emerging markets. This has been, in part, a result of cost and time savings stemming from low-cost carriers and more efficient operations at airports. As such, we continue to forecast the average rate of aeronautical and commercial revenues in emerging market regions at approximately 55 percent and 45 percent, respectively.

For road infrastructure, traffic growth has, for several years, outpaced economic expansion — though we expect it to begin converging in 2019. Depending on the road’s maturity and other factors, we expect traffic in 2019 to rise between 1 percent and 4 percent across the world, except for China and North America.

And our forecast for the port sector remains overall positive, driven by solid credit performances with generally stable outlooks. But, despite being a stable source of investment, some macroeconomic influences could produce short-term volatility.

Because these sectors are more sensitive than others to GDP growth, what factors do you think could negatively affect economic activity in 2019?

S&P: Various ongoing world events could adversely affect economic growth. For instance, the escalation of the U.S.-China trade tensions may decrease global economic activity, potentially impacting traffic volume. And, for Europe, one of the biggest risks is the outcome of the Brexit agreement, which remains largely uncertain.

Regarding the disruption that global trade wars might bring, is each sector equally at risk?

S&P: The degree of disruption to each sector is likely to vary. For ports, some adverse impacts may be seen for ship container volume on the Asia-Pacific trade route; however, at present, signs suggest that volume is holding up well. We believe that over time, the level of trade itself will not suffer. The more likely outcome is that an increase in intra-Asia trade will begin to change trade patterns.

The impact is harder to predict for roads and airports. Traffic volumes on toll roads may be impacted by a cool down of economic activities. And there are headwinds for airports, too, though we currently expect the impact to weigh more on cargo throughputs than on passenger traffic.

Can you expand on what the impact of Brexit might be?

S&P: European airports will likely be most affected by Brexit. For this sector it represents a double-edged sword, bringing opportunity as well as risk.

As U.K lawmakers attempt to offset the prospects of slower economic growth following Brexit, investment in infrastructure could accelerate. Heathrow Airport in the U.K., after many years of delays, finally secured parliamentary approval to fund construction of the third runway in 2018. Other European airports are pressing ahead with significant expansion plans: the building of a new runway at Dublin Airport and a large-scale complex at Amsterdam Airport Schiphol is already under way.

Yet the nature of the Brexit deal is not wholly determined. Should a disruptive Brexit occur, airport operators with heavy reliance on EU-U.K. traffic could be sensitive to a period of disruption, or even a prolonged economic downturn.

Are you seeing any other key trends?

S&P: Merger and acquisition activity continues for airports as they seek to consolidate their competitive positions. In Europe, we expect M&A in 2019 to continue amid low interest rates, accumulating financial headroom, and a pipeline of opportunities.

In Latin America, we do not expect significant M&A activity for airports anytime soon. That said, the privatization of 12 airports in Brazil is rousing attention. With auctions scheduled for the first quarter of 2019 and, given the more favorable prospects under the new Brazilian administration, we expect international players to resume their bids.

The story is slightly different for toll roads, however. In Latin America, we expect opportunistic M&A activity for assets related to sponsors emerging from financial distress in Mexico, Brazil, Peru and Colombia.

Elsewhere in the toll road sector, M&A activity is also flourishing. Cash flow stability and sound margins generated by some of the EU’s largest road and car park operators have made this asset class more appealing to investors, lured by the opportunity for high returns. Depending on the nature and structure of such transactions, M&A may affect issuers’ credit metrics, which are relatively weak in the sector.

But M&A does not present an opportunity for all sectors. In fact, risk from acquisitions could emerge in various parts of the global port sector. Acquisitions by financial investors are on the rise again following a lull, and prices may become high as competitive funds target the better-quality assets.



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