Florida Train Developer Wants PABs Issued Quickly

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BRADENTON, Fla. — The developer of a private Florida intercity passenger train system plans to quickly issue $1.75 billion of private activity bonds after approval of the deal, the company's president said Tuesday.

The unrated, tax-exempt bonds to finance a portion of the $3.5 billion All Aboard Florida project still must be approved by the state under the Tax Equity and Fiscal Responsibility Act, and the Florida Development Finance Corp. as the conduit issuer.

The FDFC board will give final consideration of All Aboard Florida's bond resolution in Orlando on Aug. 5.

The agency released bond documents for the meeting this week.

Five hours have been set aside by FDFC for presentations by project proponents and opponents, which include two Florida counties that have pending legal challenges to the U.S. Department of Transportation's PAB allocation.

"We are really looking forward to presenting our project and completing this part of the process," AAF President Michael Reininger said in an interview with The Bond Buyer. "Our intention is to move expeditiously with this financing."

Reininger said he anticipates that the FDFC board will approve the bond resolution, but had no details about the pricing date for the bonds.

AAF is still working through logistics related to the sale, including an "appropriate marketing period," he added.

The FDFC's financial advisor, Jeff Larson, president of Larson Consulting Services, has recommended approving the deal.

Before the bonds can be sold, the transaction also needs final approval through the TEFRA process to meet federal tax requirements. The status of that process, handled by the Florida Division of Bond Finance, was not immediately available.

All Aboard Florida is building a 235-mile train system linking Miami with Orlando.

Much of the route is already a long-standing rail freight right of way.

Most of the stations are already under construction while the project still needs final federal environmental approval.

The project is owned by equity firm Fortress Investment Group LLC, and has been hailed by supporters and rail organizations as the nation's first private passenger train system. Another private passenger train service is under development in Texas.

All Aboard Florida's private activity bonds will be sold initially in a term-rate mode without liquidity support, and subject to mandatory tender at an unknown date, according to bond documents prepared for the July 29 FDFC meeting.

The bonds will be sold in minimum denominations of $100,000 to qualified institutional buyers with final maturity in 2045.

There are provisions for converting the debt to a fixed rate.

The company is providing an equity contribution of $685.6 million.

The deal likely will attract high-yield funds, though it potentially eliminates some qualified investors due to its private ownership and "speculative" aspects, according to a muni manager in the Southeast who asked not to be identified.

The manager said that his firm favors mass transit but likely would forego investment in All Aboard Florida because the project is privately owned and financed, and doesn't have major backing from the state or communities similar to other kinds of municipal bond financings.

"In this case, it's a very unique project for the state of Florida because mass transit is not a big thing," compared to other parts of the country, said the manager. "And because of that, there is a speculative aspect to this."

While All Aboard will benefit from the tax-exemption on the private activity bonds and resulting lower cost of financing, the manager described the deal as "almost like venture capital" due to the complexity of the start-up nature of the project.

"I think this will see fairly strong demand from institutional investors," the manager said, adding that it probably will attract "very large high-yield municipal funds" and insurance companies.

The manager said the transaction could also attract investors who typically do not invest in munis such as investors in the corporate bond market.

Investors considering All Aboard's bonds will face numerous risks, according to a draft preliminary official statement, which contains 24 pages of risk factors.

Those risks include the fact that "there can be no guarantee that the company will achieve profitability and generate positive operating cash flows in the future. The company has never independently constructed or managed a passenger railroad."

Other risks include the fact that All Aboard cannot guarantee that its plan of finance will pay for all the costs to build the project, and ridership estimates may not be accurate.

The transaction is not being registered with the Securities and Exchange Commission, and the limited offering memorandum will not include information such as audited or unaudited financial statements of the company, the document said.

The offering memorandum discloses that the two Florida counties are pursuing various claims in separate lawsuits challenging the USDOT's private activity bond allocation.

The suits, filed by Indian River and Martin counties where no train stations are planned, are currently in the discovery phase.

"Although the company believes these claims are without merit and intends to defend these claims vigorously, if any of the plaintiffs were to prevail on such claims by a final, non-appealable judgment, the interest on the Series 2015 Bonds may be taxable," the offering memorandum said.

While train stations are under construction in Miami, Fort Lauderdale, and West Palm Beach, All Aboard Florida still has not received final federal environmental clearance.

The Federal Railroad Administration is reviewing the final environmental impact statement under the National Environmental Policy Act. The agency received thousands of comments on the draft EIS.

All Aboard has covenanted to the USDOT to complete and implement any additional measures required by the final EIS "to avoid, minimize, or mitigate any adverse effects of the project on the environment."

The PAB allocation authorized by the USDOT prohibits All Aboard Florida from using bond proceeds until 45 days after the final EIS is released, and until all federal, state, and local permits are obtained.

The final EIS can be challenged in court.

Reininger said Tuesday that the company is hopeful that the release of the final EIS is imminent.

While the deadline to issue the PABs was recently extended to Jan. 1, Reininger said that is an "outside date" to sell the debt.

Once approvals under FDFC and TEFRA are in hand, he said, "our intention is to get out to the capital markets as soon as possible."

The deal, likely the largest ever by the Florida Development Finance Corp., will bring in fees for serving as conduit issuer, though the agency would not specify how much it would receive.

"Fees will be based on the corporation's fee schedule," the FDFC said through Wragg & Casas Public Relations, a firm recently hired by the agency to handle inquiries about the high-profile project.

Bank of America Merrill Lynch will be the senior managing underwriter. Other firms in the syndicate are JPMorgan, Morgan Stanley & Co., and Piper Jaffray.

Greenberg Traurig is bond counsel. Underwriters' counsel is Mayer Brown LLP.

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