Brightline expansion plan leads Fitch to withdraw rating

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The rating on $600 million of private activity bonds issued for Florida’s private passenger train project has been withdrawn by Fitch Ratings because the project’s strategic focus has expanded to include new developments.

Fitch said it withdrew its BB-minus rating on the $600 million of PABs because the company no longer fits under its criteria for infrastructure and project finance, a determination that was announced Tuesday after an annual review of the credit.

“It was Fitch's understanding that Brightline would operate as a dedicated vehicle focusing on the south segment rail line, with potential expansion to Orlando,” said analyst Stacey Mawson. “A strategic focus that includes real estate expansion brings this outside of Fitch's criteria for infrastructure and project finance.”

The Florida Development Finance Corp. issued the $600 million in PABs on Nov. 30, 2017, to finance development of its route between Miami and West Palm Beach, the southern segment of a planned expansion to Orlando.

The FDFC is expected to issue another $1.15 billion of PABs to finance the Orlando extension. A portion of the proceeds will be used to refinance the $600 million sold last year.

A Brightline spokesman said the removal of Fitch’s rating “is a technical distinction, has no material impact on our operations and speaks to the evolution of our company and the expansion of the projects we are undertaking.”

Since Fitch first rated the bonds in 2017, Brightline has announced acquiring plans for XpressWest, an undeveloped high speed rail project from Victorville, California, to Las Vegas, along with the purchase of 38 acres near the Las Vegas Strip for a station and mixed-use development.

The Florida Department of Transportation and the Central Florida Expressway Authority agreed Nov. 28 to negotiate with Brightline to lease right of way to expand passenger train service from Orlando to Tampa.

On Nov. 16, Brightline inked a trademark licensing agreement with British billionaire Richard Branson’s Virgin Group. It will allow the company to rebrand itself as Virgin Trains USA next year to potentially pursue other expansion efforts around the country.

Although the rating has been withdrawn, Mawson said the project’s ridership has outperformed Fitch's rating case.

“Brightline's ridership and revenue have steadily ramped up following the delayed opening earlier this year,” she said. “Given the one-month delay in opening West Palm Beach to Fort Lauderdale and almost six-month delay in opening the Miami Central station, year-to-date 2018 ridership is significantly below original projections.”

If the delays in opening are considered and monthly ridership projections are pushed back, Mawson said total ridership is only 5.3% below projections.

Brightline, the first for-profit passenger rail service to operate in the United States in decades, began service between West Palm Beach and Fort Lauderdale in January. Service to Miami began in May.

“Current management projections through year-end 2019 shows ridership will overtake original projections in July 2019,” said Mawson.

Although the project wasn't expected to be cash-flow positive by now, Fitch said Brightline expected to have sufficient cash on hand — $14 million under Fitch's rating analysis, and $19 million under the sponsor’s projections — in its ramp-up reserve along with an undrawn $50 million working capital revolver to cover revenue shortfalls as ridership and revenue ramped up.

“Such funds have been depleted due to station opening delays and increased operating costs tied to an initial public offering, Brightline's bid on the Tampa expansion and pre-work on the Orlando expansion, rendering Brightline reliant on continual ongoing equity injections from its parent company, Florida East Coast Industries,” said Mawson, who added that Fitch doesn’t rate FECI.

“Given the project's long-term economic value to FECI, Fitch's understanding is that FECI will continue to support Brightline until it is cash-flow positive, which management projects to occur in 2019,” she said.

AAF Holdings and Brightline had begun work on an initial public offering earlier this year, according to Securities and Exchange Commission records. That information changed Nov. 16 when a registration statement for Virgin Trains USA LLC was filed.

In its November ridership and revenue disclosure for the 2017 bonds, Brightline reported carrying 80,660 passengers and generating about $1.5 million in revenue for the month.

“Brightline has demonstrated a steady ramp up since launching introductory service in January, including a 42% increase in ridership in the second quarter of 2018 compared to the first quarter of 2018 and an increase of approximately 50% in ridership in the third quarter of 2018 compared to the second quarter of 2018, the report said. “For the month of November, ridership increased 34% from October.”

The disclosure report also included information about Brightline’s deal with Virgin and negotiations with state agencies to lease right of way for the Tampa expansion.

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Transportation industry Private activity bonds Infrastructure IPOs Florida Development Finance Corp. Florida