Fitch: Law Raises Brazilian Toll Road Concessionaire Risk

NEW YORK & SAO PAULO, Brazil--()--A law exempting some trucks from tolls on Brazilian roadways will pressure concessionaires over the short- and mid-term, according to Fitch Ratings. The measure further weakens the stability of the sector's regulatory environment and underscores its increasing political risks.

The new law will slightly affect the volume of equivalent vehicles, road maintenance expenses and the costs of monitoring and inspecting cargo volumes, causing a moderate decline in revenues and an increase in expenses. Projects should be able to get compensation in some form, potentially through concession term extension, and preserve their internal rates of return (IRR). Nonetheless, we expect a slight but immediate reduction in debt service coverage ratios (DSCRs). Ratings sensitivity will depend on the traffic profile, management of operating expenses and flexibility in ongoing maintenance investments. Roads with higher concentrations of heavy and commercial vehicles are likely to face greater effects.

The higher cost of monitoring freight will have a minor impact, and the increase in weight overload tolerance may reduce the useful life of pavement. According to the Associacao Brasileira de Concessionarias de Rodovias (ABCR), the useful life of pavement declines, on average, in approximately 18 months at a 5% overload tolerance and in about three years at a 10% overload.

The law also underscores the fact that the sector is increasingly exposed to political risks and the regulatory environment. In July 2013, Sao Paulo's granting authority decided not to adjust toll rates by inflation. As of July 2014, the concessionaires received a tariff readjustment below inflation. Changes to the regulatory framework, which affect the existing contracts, even if combined with compensatory measures, are a negative for the credit quality of the sector, as a whole, as they add uncertainty to concessionaire cash flow stability and predictability.

The law was signed by President Dilma Rousseff on March 2 and will go into effect on April 17. It makes suspended axle, freightless vehicles exempt from tolls and increases the weight overload tolerance from 5% to 10% of the maximum limit. This law was a response to the truck driver's' strike that occurred in February and March of this year, which affected the supply of products to several cities.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Bruno Pahl
Director
+55 11 4504-2204
Global Infrastructure & Project Finance Group
Alameda Santos 700
Cerqueira Cesar, Sao Paulo, Brazil
or
Bernardo Costa
Senior Director
Global Infrastructure & Project Finance Group
+55 11 4504-2607
or
Gisele Paolino
Director
Global Infrastructure & Project Finance Group
+55 21 4503-2624
Praca XV de Novembro, 20, Sala 401-B
Centro
Rio de Janeiro, Brazil
or
Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159
33 Whitehall Street
New York, NY
or
Media Relations:
Jaqueline Carvalho, Rio de Janeiro, +55 21 4503 2623
Email: jaqueline.carvalho@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Bruno Pahl
Director
+55 11 4504-2204
Global Infrastructure & Project Finance Group
Alameda Santos 700
Cerqueira Cesar, Sao Paulo, Brazil
or
Bernardo Costa
Senior Director
Global Infrastructure & Project Finance Group
+55 11 4504-2607
or
Gisele Paolino
Director
Global Infrastructure & Project Finance Group
+55 21 4503-2624
Praca XV de Novembro, 20, Sala 401-B
Centro
Rio de Janeiro, Brazil
or
Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159
33 Whitehall Street
New York, NY
or
Media Relations:
Jaqueline Carvalho, Rio de Janeiro, +55 21 4503 2623
Email: jaqueline.carvalho@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com