Brightline Florida restructuring and lender dispute casts shadow on Brightline West

Octus

Brightline Florida's Chapter 11 filing coincides with mounting financial pressure on Brightline West, the proposed high-speed rail link between Las Vegas and Southern California. As the West Coast project struggles to finalize its financing package, debt restructuring and lender disputes from the Florida case may spill over into the West Coast project.

Years of complex litigation over a 2022 transaction involving parent company Brightline Holdings and Fortress Investment Group, which backs both projects, carries implications for each credit and could reshape governance of the West Coast rail line.

The $21 billion West Coast project, which aims to be the nation's first electric high-speed train, has $2.5 billion of unrated debt, making it one of the largest and closely watched credits in the high yield municipal bond market. It is seeking a $6 billion Railroad Rehabilitation and Improvement Financing loan that municipal market investors view as not only key to the project's viability, but also its ability to repay bondholders.

Brightline applied for the loan last October, and in September told the market that it expects to hear by the end of October about the fate of the loan.

"Brightline West is setting up to have a very bifurcated outcome in the near term, because the municipal bonds will be repaid if they get the RRIF loan," said Shannon Rinehart, co-head of municipal investments at Columbia Threadneedle Investments.

"If they do not get the RRIF loan, it will be imperative to find another cash infusion or a restructuring may be required. Brightline West has indicated they do not intend to come back to the municipal market."

The company faces a Nov. 1 deadline for a mandatory bond tender and a $400 million equity raise. The deadline comes after bondholders granted the company additional time last month — an "amend and extend" pattern that became the pattern for Brightline Florida over the last year as that project became more financially distressed.

"I don't see a great incentive for [bondholders] to probably do anything but amend and extend and push those deadlines out with the hope that the RRIF loan is locked in and that leads to the opening up of additional financing," said Lucas Hammonds, senior legal analyst at Octus. "I would think things could change if the RRIF is denied. Then the landscape would be different and the incentives would shift."

The market seems to have priced in the impact of Florida's restructuring and the West's strained finances.

The Brightline West bonds have "taken quite a bit of a performance hit already," Rinehart said.

More than $13 million of California Infrastructure and Economic Development Bank bonds due in 2065 with a 12% coupon traded on Sept. 25 for 68 cents on the dollar. That's up slightly from where the paper was trading in early September.

Perhaps the thorniest issue facing Brightline West — and now Brightline Florida — is a three-year-old lawsuit brought by a pair of prominent investment funds .

CK Opportunities Fund I, consisting of Certares Management LLC and Knighthead Capital Management LLC, filed its complaint in New York in 2023 for "fraudulent and grossly negligent acts and contractual breaches" by Morgan Stanley, parent company Brightline Holdings and a group of subsidiaries that include BL West Holdings LLC — which holds the Brightline West project.

In 2022, a Fortress-backed entity purchased a controlling interest in BL West Holdings, the equity transfer is at the heart of the complex litigation.

The principal assets of parent company Brightline Holdings, now a debtor in the Chapter 11, are long-term commuter rail rights in Florida and a planned expansion to Tampa, as well as a non-controlling 40% interest in BL West Holdings.

Last Tuesday, at Florida's first-day hearing, the judge approved the DIP financing interim order over CK Opportunity Fund's objections. It's difficult to win an interim DIP objection, said Hammonds, "but it's a chance to sensitize the court and the other parties to a lot of the major issues that you might want to advance down the road."

The upper-tier holding company subsidiaries who are part of the pre-bankruptcy litigation are now debtors in the Florida bankruptcy, Hammonds said. "So claims against them are going to be restructured, and there's potentially not going to be a pocket to look to [for CK Opportunities' claims] in the way there might have been absent a bankruptcy."

Brown Rudnick LLP attorney Robert Stark, attorney for CK Opportunities, suggested to the judge that the bankruptcy filing wasn't necessary given broad support for the pre-packaged Restructuring Support Agreement, and speculated the Chapter 11 may be designed to push CK Opportunities off to the side and cut off a potential source of recovery for the fund.

The fund is a "loose end" that Fortress and the debtors would "love to get rid of," Stark told the court, warning the loose end "could become massive litigation in the days ahead."

If CK successfully advances its fraudulent transfer claim in the bankruptcy court, the end result could unwind the contested transaction and Fortress's control of BL West Holdings.

That could shift governance back to Brightline Holdings or its creditors, potentially disrupting project leadership and invalidating parts of the RSA, Hammonds said.

"Unwinding that equity issuance transaction and changing board control changes things for Brightline West because different people are going to be making the decisions," Hammonds said.

"It seems right now the most potential effects on the Brightline West [debt] silo flow through Brightline Holdings and the CK Opportunities issues," he added. "So we'll be watching what they do in the bankruptcy and what kind of stances they take."

Brightline Florida subordinate muni bondholders and so-called commuter holders also have equity liens on Brightline West, the result of prior negotiations over late debt payments. The RSA preserves their rights to the equity, but the cross-collateralization may carry consequences, said Robert Charbonneau, a bankruptcy and restructuring attorney at Florida-based Agentis PLLC.

"They were separate projects with separate debt, but liens were given on the Las Vegas project as additional security, so the independent debt structure that was there is not so independent now," Charbonneau said.

"If it's a consensual plan, then the Vegas project is probably safe, but if this whole thing craters — which I don't think is going to happen — and the bondholders are looking to be made whole from Brightline and they're not, and they have liens on the other project, then all bets are off."