With investment-grade ratings in hand, Brightline shops to investors

Florida’s Brightline passenger train, long a prominent name in the high-yield municipal market, is gearing up for its investment grade market debut with a $2 billion deal that marks a first step toward an overhaul of its debt load.

Another $1 billion of subordinate high-yield bonds that will be a mix of taxable and tax-exempt is also being shopped to investors, market participants said. The finance team, led by Morgan Stanley, is holding investor meetings on the transactions next week, including a site visit. A sale date is not yet set, according to investors. A Brightline spokesperson did not respond to requests for comment.

The deal will come to a market flush with cash after weeks of inflows and amid a dearth of high-yield supply. Up to $1 billion of the $2 billion investment-grade deal may include Assured Guaranty insurance, which along with the investment grade rating is expected to broaden retail appeal.

Brightline Trains Florida LLC owns and operates a $6 billion, 235-mile train system from Miami to Orlando, dotted with stations in between, that marks the nation’s only private passenger intercity express system. An extension to tourist-laden Orlando airport opened last September — giving analysts and investors a glimpse of long-distance ridership demand — and an extension to Tampa is under consideration.

In operation since 2018, Brightline has been one of the market’s largest speculative-grade project finance deals and one of its most active secondary market names. The bonds have offered high-yield investors income growth in a market pockmarked by troubled deals like American Dream and Legacy Cares. The bulk of the bonds, around $2.5 billion, are held by Nuveen, where the credit makes up four of the High Yield Municipal Bond Fund’s top 10 positions and is held across several other of the firm’s muni funds.

Nuveen declined to comment for the story.

Brightline is seeking to refinance roughly $3.5 billion of outstanding senior debt. The restructured capital stack would be a mix of senior and subordinated taxable and tax-exempt bonds, taxable senior and subordinated notes and equity, the company said in September bond documents. 

Parent company Fortress Investment Group has contributed $2.2 billion of equity in cash and assets, which will represent 32% of the capital structure once the full refinancing is complete, according to preliminary bond documents.

DWS Group, which has held the name for years, has seen the buyer base grow and an increasingly active secondary market presence, said Chad Farrington, co-head of municipal bond strategy at DWS.

“This has gained more acceptance over the years, but when it first came, and still now, there are some buyers who either really love it or don’t believe in it,” Farrington said. The company’s progress “has been great,” he said, adding that Florida’s fast-growing population and job growth bodes well for its future, including the proposed extension to Tampa.

High-yield supply remains anemic and the refinancing will pull more bonds out of the space, Farrington said. “The fact that you’re going to see fewer below-investment grade bonds, there will be a scarcity factor that should play pretty well for the deal,” he said.

DWS will be looking “at the entire deal,” he added, saying that in the end, demand will come down to pricing.

CreditSights, in an April 5 report, predicted the bonds “will be priced at spreads wider than for traditional ‘public purpose’ bonds, and wider than AMT airport bonds.”

The risks associated with the project will require attractive pricing, CreditSights Senior Municipal Strategist Patrick Luby told The Bond Buyer.

“There are elements of a startup — even though it’s running — and ramp-up risks associated with the project that will be reflected in the price,” Luby said. “There’s going to need to be a combination of investor types who are interested in the transaction to get the deal subscribed.”

While an Assured wrap would broaden retail appeal, the 2057 final maturity may be too long for many retail buyers, he said. The long duration and large block sizes will be attractive to mutual fund portfolio managers, who are the “only natural buyers right now of long duration munis,” Luby said.

“A mutual fund portfolio manager will be coy about the pricing but they’ve got the cash for it,” he said. “It’s going to be a really large size and there will be multiple investors who will end up having positions in the deal, so that will help foster better future secondary market liquidity.”

Ratings analysts said investment-grade ratings are supported by a conservative debt structure, ample liquidity and ridership projections, despite being lower than estimates floated by the company, which itself has cut projections in recent months.

Brightline’s ridership projections predict eight million annual riders in 2026 though only 3.2 million riders are needed that year to meet debt service. That’s an 11% market share, according to road show documents.

“There are risks toward what the ridership will be and what revenue they will get from riders at least for the next several years,” said Fitch Ratings analyst Seth Lehman. Fitch, like S&P Global Ratings, assigns a BBB-minus/stable rating to the $2 billion of senior debt.

But the debt structure of the refinanced debt, their cash on hand and the use of some of the proceeds to prefund interest and debt service reserve accounts, gives them flexibility, Lehman said. “The structure gives them a lot of margin in case they underperform,” he said. “They don’t have a very high fixed cost on their debt to worry about in their initial years.”

Ridership projections are also key to Kroll’s analysis and BBB/stable rating, said Kroll analyst Maria de Urquijo.

Even with projections less optimistic than Brightline’s, the transaction still “shows strong resiliency,” Kroll said in its report.

“The fact that this project has been in operation since 2018 provides a little more comfort,” de Urquijo said. “They survived the pandemic, during which they were doing construction on the northern segment and didn’t have many delays,” she said, noting in the report that ridership recovered rapidly once the service reopened. And the first several months of operations to Orlando “also gave us some comfort in terms of the initial ramp up,” de Urquijo said.

Morgan Stanley is leading a syndicate with five underwriters. PFM Financial Advisors LLC is financial advisor. Greenberg Traurig PA is bond counsel. The Florida Development Finance Corporation is acting as conduit issuer.

Fortress is also developing a second line, the $12 billion Brightline West electric train between southern California and Las Vegas. The project won $3 billion in federal grants late last year and a $2.5 billion private activity bond allocation in January. The two are among a handful of fast or high-speed train projects struggling to get off the ground around the country, including in Texas, California and the Pacific Northwest.