Bonds issued to finance US infrastructure projects have roared back from a dismal 3Q22, with most of an Infralogic index of 22 actively traded securities rising in price in the fourth quarter and adding to those gains so far in 2023.
In fourth-quarter trading, only four of the 22 tracked bonds fell in price, and all but one of the issues have risen in value since the beginning of January. In 3Q22, in contrast, all actively traded project bonds tracked by Infralogic fell in price.
On average, the Infralogic-tracked bonds rose by 3.59 points, or 4.3%, in 4Q22, while yields fell 30bps. Only four of the securities fell in value during the quarter. So far this year, the bonds have risen an average of 2.84 points, or 3.11%, and yields have fallen an average of 36bps. Only one of the bonds has declined in value so far this year.
In part, the rebound mirrors that of many public equity and debt markets. The S&P Municipal Bond Infrastructure Index rose 3.9% in 4Q22 and is up another 2.76% so far this year, and the narrower S&P Municipal Bond Infrastructure Select Plus Index of bonds that are a minimum of USD 100m in size rose 3.7% in the fourth quarter and has added 3.65% YTD in 2023. Ten-year Treasury yields rose 5bps to 3.88% in 4Q22, but have retreated to 3.67% this year (yields fall when bond prices rise).
In 4Q22, the S&P 500 stock index rose 7%, and have added another 7.7% so far this year. The Dow Jones Industrial Average rose 15.4% in 4Q22 and is up 2.2% so far this year. Meanwhile, the Nasdaq index fell 1% in the fourth quarter but has rebounded 15.7% this year.
In 2022 overall, the 22 Infralogic-tracked bonds fell an average of 11.49 points, or 10.72%, while yields rose an average of 144bps. In the third quarter, all Infralogic-tracked bonds fell in value, averaging a 15.48% decline, as reported.
Highlights
The biggest 4Q22 gainer in the Infralogic index was:
North Tarrant Express (NTE) Toll Road P3
Tranche:
USD 871.1m, 3.922% bonds due 31 December, 2049
Last 2022 trade:
USD 81.49, 5.21% yield
4Q22 price-performance:
12.98%
Latest trade:
81.29, 5.22% yield
YTD 2023 price-performance:
-0.25%
Project synopsis:
Building, maintaining and managing 13.3 miles of the North Tarrant Express highway in the Dallas-Fort Worth, Texas, area.
Performance:
The project generated USD 177.5m in revenue through 30 September, 11.3% above budgeted expectations, though transactions on the toll road totalled only 26,691 — 3% below budget projections, according to a project update published on 29 December. The update attributed the lower number of transactions to the Covid pandemic, severe winter storms and “the general economic environment,” but noted that “these effects were significantly offset by higher toll rates.” Those higher rates helped the project generate a profit of USD 79.6m over the nine months ending on 30 September — 27% above budgeted projections. Also helping were lower-than-expected capital expenditures of USD 4.6m, 41.8% below budget projections.
Ratings action and commentary:
Moody’s on 8 December upgraded the bonds to Baa2 from Baa3, citing higher-than-expected revenue performance on the highway’s open sections and construction progress on the rest that is 85% complete. “We expect strong demand growth to continue, especially once the 3C extension opens next year,” Moody’s analysts wrote. “As a result, we now forecast stepwise higher financial metrics than originally forecast.” The under-construction portions of the highway are scheduled to open in September, Moody’s analysts wrote. Fitch affirmed its BBB rating on the securities on 29 November. “The project exhibits a very strong degree of financial cushion, with Fitch rating case DSCR [debt service coverage ratio] averaging 2.7x from 2022-2031 and 3.3x over the debt life,” Fitch analysts wrote.
Only four bonds in Infralogic’s actively traded index declined during 4Q22. The largest decliner was:
Southern Ohio Veterans Highway (Portsmouth Bypass)
Tranche:
USD 63.2m, 5% bonds due 30 June, 2053
Last 2022 trade:
USD 97.25
4Q22 price-performance:
-1.02%
Latest trade:
USD 100.79
YTD 2023 price-performance:
3.64%
Project synopsis:
DBFOM of a 16-mile highway in Ohio.
Performance:
The project reported 3Q22 revenue of USD 6.74m, 1% over model projections, but expenses of USD 684,050 were 17% above expectations, according to a financial report published on 8 December.
Ratings action and commentary:
Moody’s reviewed the bonds in September as part of a routine review of a number of securities but took no action on their A3 rating. The company upgraded the bonds from Baa2 in December 2019. Fitch Ratings in July 2022 affirmed its A- rating on the bonds, citing “solid operating performance and healthy financial metrics in the first three years of operations.”
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