I’m convinced that studying the behavior of Millennials –and in particular how it differs from previous generations’–will ultimately produce a treasure trove of equity investment ideas.
So my ears perked up when I began noticing recent reports of continuing failure of toll road investment projects that had been in vogue ten years or so. Many were packaged by Australian investment bank Macquarie and/or Spain’s Ferrovial.
Chapter 11 filings have been attributed in the media to a sharp slowdown in total miles driven by Americans since 2007 (“…largest decline since World War II,” said one article). Millennials’ aversion to autos and the suburbs are the supposed causes.
A quick check shows that’s not exactly right.
The Federal Highway Administration’s monthly Traffic Volumes Trends indicates that total miles driven by Americans has fallen from the peak of 3.03 trillion miles in 2007. But the present level is still 2.98 trillion, a seven-year decline that totals only 1.65%. Yes, this is a change from the pretty steady rise of just over 1% annually during the prior couple of decades. But it’s hard to image that worst-case planning didn’t allow for a flattening out of traffic volume.
Two other characteristics of these deals stand out to my, admittedly cursory, glance, as being much more important:
–they’re very highly financially leveraged, and
–they contained a ton of derivative protection against rising interest rates–which backfired horribly, adding significantly to the already-high debt burden.
The deals also appear to have suffered from wildly overoptimistic projections of future road usage, although these were likely less linked to project survival and more to the possibility of above-average gains.
In any event, my main point is that this is not a story of differing Millennial behavior. It’s all about bad project design and mistaken derivatives overlays.