After failing debt service coverage tests in recent years, Greenway is not allowed to pay distributions to investors

Business Strategy and Outlook

Atlas Arteria is a global toll-road group with, effectively, two assets. By far its most valuable asset is a 31% stake in Autoroutes Paris-Rhin-Rhone. Despite APRR’s dominant motorway network in eastern France, the short concession life, high base capital expenditure requirements and subdued organic growth make it less attractive than some motorways. Nonetheless, lower interest and tax rates should support growth in APRR’s earnings and distributions in the medium term. Longer term distribution growth is likely to be held back by the eventual normalisation of interest rates and, from the mid-2020s, the need to pay off all debt at APRR before handing the motorway concession back to the government in 2035. After the APRR concession ends, Atlas Arteria’s distributions will fall by two thirds to a level supported by the smaller Dulles Greenway.

APRR is one of the largest tolled motorway groups in Europe. Concessions covering its main network end on Nov. 30, 2035, and on the smaller AREA network on Sept. 30, 2036. These concessions are relatively short compared with those for other listed toll-road operators. When the concessions end, the roads are returned to the government for no consideration and after repaying all debt. The APRR concessions set base toll increases at 70% of the consumer price index, or CPI, excluding tobacco, and set a base level of maintenance and upgrade capital expenditure of about EUR 200 million per year.

Atlas Arteria’s other main asset is the wholly owned Dulles Greenway in Virginia, a 22-kilometre toll road connecting Leesburg with Washington Dulles International Airport. Along with high debt levels, the main issue for Greenway was falling traffic volumes following the global financial crisis and as competing roads have been upgraded. After failing debt service coverage tests in recent years, Greenway is not allowed to pay distributions to investors. There can be no value attributed to Atlas Arteria’s other assets, which are small and have extremely high financial leverage.

Financial Strength

Atlas Arteria is in sound financial health. Net debt/EBITDA for APRR, including holding company debt, was 3.5 times at December 2021 and it is alleged to be lower to 3.0 in 2022. Thereafter, financial leverage is forecast to fall to relatively conservative levels as EBITDA recovers from coronavirus lockdowns. It is foreseen, margin expansion going forward, underpinned by projected toll increases and traffic volumes, while operating costs are likely to be well-contained. The main debt covenant limit is net debt/EBITDA of 7.0 times. This should prove adequate headroom, unless the coronavirus impact is significantly worse than expected. Interest rates on more than 80% of debt are fixed or hedged for life. We estimate the APRR Group has a weighted average debt maturity of around six years. This fairly long debt maturity profile reduces refinancing risk. Atlas Arteria’s other assets have aggressive financial leverage, but all debt is nonrecourse, which limits risk. The best of Atlas’s remaining assets is Dulles Greenway, which had net debt/EBITDA of 19 times in December 2021. While leverage is very high, it probably won’t prove fatal thanks to the road’s very long term, fixed rate debt, which means the company has no refinancing requirements and no interest-rate risk. Nonetheless it is unable to pay dividends to Atlas until debt service coverage (EBITDA/total debt service) improves. Debt service coverage was 0.85 times in December 2021, well below the 1.25 times threshold required to reinstate dividends. As coverage fell below 1.15 times, the road is barred from paying dividends for a minimum of three years. With poor traffic volumes following coronavirus lockdowns and upgrades to competing roads, Greenway’s debt service coverage is unlikely to improve to the point that it can start paying dividends until at least 2025.

Bulls Say’s

It is projected for distributions to investors grow strongly during the next several years as interest and tax rates at APRR fall.
APRR is a good quality asset. Revenue is defensive and earnings have a positive long term outlook. Dulles Greenway adds longer-term value.
Toll roads are in high demand from pension funds and other large investors searching for yield. The two best roads could potentially be sold for high prices.

Company Profile

Atlas Arteria is a global toll-road investor created out of the reorganisation of Macquarie Infrastructure Group in 2010. The firm’s main asset is a 31.1% stake in Autoroutes Paris-Rhin-Rhone, or APRR. APRR owns concessions to toll more than 2,300 kilometres of motorways in eastern France, most ending late 2035. The firm also wholly owns the Dulles Greenway toll road in the U.S.

(Source: MorningStar)

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