Friday, 12 February 2016

M6 toll road up for sale: a good long term prospect?

According to the FT, the consortium of 27 banks and lenders which own the M6 Toll Road (including Crédit Agricole, Commerzbank and Banco Esparto Santo) have decided to sell the road to attempt to recover the £1.9 billion (US$2.76 billion) debt tied to the road.  The road is still managed by Macquarie Atlas Roads which holds 100% of the equity in it, although the beneficial interest is zero due to the underlying debt (which was subject to restructuring at the end of 2013). 

M6 toll road bypasses the M6 through Birmingham
The concession ends in 2054, so any investors will be looking at the long term.  They have to, since the road has yet to turn a profit, as the road average 48,000 vehicles per day, well below forecasts of 72,000 when the concession was let.  Yet growth has been significant as of late, with a 12.6% increase in traffic for 2015 over 2014.  This suggests it is not far from returning to its previous record demand of 55,000 per day in 2006 (although that still is insufficient to break even).  It cost £900 million (US$1.3 billion) to build in 2002 values and prices (around £1.3 billion (US$1.88 billion) in todays prices).

The road lost £28.6 million in 2014 (debts have simply been increased to absorb the losses on top of the capital cost for the construction).

As I wrote before, the project has been good for the taxpayer, as it is completely unsubsidised, debt is not backed by the Crown and Treasury still gets revenue from fuel tax paid through burning petrol and diesel on the road, without paying a penny for maintenance.  However, it is also likely that the 1p nominal drop in fuel duty since 2010, and the significant drop of wholesale fuel prices will contribute to some increase of demand and willingness to pay the toll increasing.

There is a modest campaign calling on government to nationalise the road and remove tolls to reduce congestion on the bypassed segment, but I doubt if the current Conservative government would be keen on bailing out private investors for a project for which there may be a buyer (given it is generally positive about tolls on roads that have a viable alternative route).

From an equity perspective, it would be justifiable for there to be some state contribution towards maintenance costs based on that revenue (and indeed revenue from vehicle excise duty and the HGV levy), but that would mean challenging Treasury's position that fuel tax is "just another tax on energy" rather than a tax that is generated primarily from using roads (unlike VAT).  There is little chance of any movement on that in the foreseeable future.

As an investment, it is definitely one for those willing to tolerate years of losses before seeing any success.  Tolls as they stand are around about at the yield maximising level.  Although it does not have electronic free flow tolls (but has a non-interoperate barrier based DSRC electronic toll system), there will be little appetite to address this while it continues to lose money.

Any investor will be hoping that economic growth generates more demand so that eventually the road can reach break even (given the "hope for a government bailout" option is almost certainly not going to happen under this government and the next general election is 2020).  Given the greatest increases in traffic in the UK in recent years have come from light commercial vehicles (PDF) (partly because of the increase in deliveries due to online retail), it is unclear whether M6 Toll is able to take advantage of that traffic.   Nevertheless, as overall traffic demand in the UK is now at pre-recession levels, and oil prices look like staying relatively low for some time, the prospects may look brighter than they have been for ten years.

Still, after 13 years of losses, it would take a courageous and bullish investor to think that paying £1.9 billion for the road is worth it.

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