CHINA'S toll-road sector may lose at least 270 billion yuan (US$38 billion) in 2020 due to a traffic slump caused by Covid-19, and an unprecedented moratorium on toll fees on all roads and vehicle types. That's according to an FAQ that S&P Global Ratings published March 16, titled "How Can China's Highway Operators Survive The Toll Moratorium?"

"We believe China's moratorium on tolls may last until mid-2020," says S&P Global Ratings credit analyst Gloria Lu. "The strategy is aimed at speeding economic recovery after a standstill in activity due to measures to contain the virus spread."

The moratorium on tolls, along with other factors, will likely reduce revenue by 50% on average in 2020 for the Chinese toll-road operators S&P rate.

Toll-road companies that operate along commercial lines are more vulnerable to rating downgrades. This is because these companies, some of which are publicly listed, generate a material portion of their operating cash flow for servicing debt from toll collections.

Provincial highway groups, which are highly leveraged, tend to have more reliance on government and bank support to maintain their debt-financed business models. Bank lenders are likely, in S&P’s view, to show forbearance to the sector until the health emergency subsides.

They anticipate a strong traffic recovery following the stabilization of the virus outbreak in China, a resumption in economic activities, and the stimulus effect of free highway travel. Traffic volumes and growth should return to normal in 2021.

The moratorium underpins inherent regulation risks to the toll road sector, which are factored into S&P's ratings on sector companies.

"We view this broad, open-ended toll moratorium as an unprecedented and temporary policy measure put in place to combat very special circumstances," Lu says. "While its abrupt roll-out points to the urgency of China's economic hit from the Covid-19 outbreak, it also reflects the intrinsic regulatory and policy risk that Chinese toll road operators face."

The Chinese government is likely to unveil measures to address short-term liquidity stress and introduce long-term compensation for the sector. In S&P’s view, compensation probably won't come in direct cash payments, which would add fiscal strain to local governments. However, authorities may consider other forms of compensation that could boost long-term financial prospects, such as extending the length of highway concessions.

S&P have recently taken rating actions on a few Chinese toll road companies. These actions reflect their opinions of their different asset exposure, financial headroom, liquidity position, and potential external support.