Brightline defers Jan. 15 interest payment on subordinate debt

Brightline

Brightline has deferred interest on a closely watched Jan. 15 debt service payment as the Fortress Investment Group-backed Florida train continues to struggle to generate enough cash to cover debt payments.

The move required bondholders to waive a requirement that the payment be made in cash, which the company disclosed Friday in a securities notice.

In return, the company agreed to pay more to the bondholders to reacquire collateral if the company opts to move forward with a planned Tampa extension, according to an investor. Raising the collateral price to $850 million from $650 million puts a floor under the third-lien bonds, which are currently trading at around 33 cents on the dollar, the bondholder said.

The bonds, which are among the most expensive in the capital stack, could also be taken out if Fortress succeeds in raising fresh equity.

Thursday's deferral on the $1.2 billion of unrated tax-exempt 2024 subordinate bonds, also known as the third-lien or AAF Operations Holdings bonds, followed a July payment when Brightline first raised red flags by deferring the interest payment. 

The July move was allowed under the bond indenture and did not technically constitute a default, but still sparked a deep drop in bond prices and dragged down the performance of some high-yield municipal bond mutual funds that hold the debt.

Brightline originally had the ability to defer, or make in-kind payments, for a set period of time, but bondholders last August added the Jan. 15 cash requirement during negotiations around the remarketing of $985 million of commuter bonds.

Many of the holders of the third-lien bonds, which carry 12% and 10% coupons, are the same firms that hold the commuter bonds.

Separately, the company tapped a portion of its debt reserves for a Jan. 1 payment on $2.2 billion of senior bonds. That includes $1.13 billion insured by Assured Guaranty.

The next payment due is Feb. 15 on the commuter bonds, which must be made in cash, according to a source familiar with the situation.

Brightline Florida owns and operates a 235-mile intercity Miami-to-Orlando train that's the nation's only privately owned intercity express rail service. The company's $5.5 billion debt stack includes several liens, taxable and tax-exempt structures and separate holding, operating and parent company entities.

The train has faced substantial ridership and revenue struggles over the past year that in late December sparked a five-notch downgrade from S&P Global Ratings. S&P said it expects default by January 2027.

Although the train is operational, the company does not seem to have enough money for debt payments. Bondholders have their hopes pinned on the company's ongoing effort to raise what it called "substantial" equity. The equity would be used to "repay principal and interest of existing higher-coupon indirect parent entities' debt of ours and to increase cash reserves," Brightline said in a separate EMMA notice Friday.

The higher-coupon debt includes the third-lien bonds as well as taxable, second-lien bonds with 11% coupons that are held by a group of hedge funds. The hedge funds have hired Davis Polk & Wardwell to advise them, the Wall Street Journal reported last week.

Herbert Smith Freehills Kramer LLP is negotiating on behalf of the majority third-lien holders.

Brightline's announcement of new leadership on Wednesday came as good news, said the bondholder. Nicolas Petrovic is "viewed as a turnaround artist and I think it's very positive that he's jumping on board right now," the investor said. "All the bondholders are just really focused on Fortress executing on this big equity raise that they're pursuing and then determining who gets paid and how much."

The issuer, the Florida Development Finance Corporation, also disclosed Friday that it has brought in Wilmington Savings Fund Society as bond trustee to replace Deutsche Bank National Trust Company.

Fortress also owns the West Coast's Brightline West, which is building what it hopes will be the country's first electric high-speed train. Brightline West is also scrambling to put together financing for that project, and all eyes are on its application for a $6 billion federal railroad loan.

A spokesperson did not return requests for comment.