FDFC should approve Brightline bonds, financial advisor says

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The financial advisor for the Florida Development Finance Corp. has recommended that the agency approve the issuance of $2.7 billion of private activity bonds for Brightline, the passenger train project that is soon to become Virgin Trains USA.

The FDFC meets Wednesday in Orlando to consider the bond resolution that would allow the private company to issue the tax-exempt debt consisting of $600 million that Brightline previously sold and plans to refinance, $1.15 billion in PABs previously authorized by the FDFC that haven’t been issued, and an additional $950 million allocation of PABs the U.S. Department of Transportation has yet to approve.

“Per discussions with the underwriter, the Series 2019 bonds are not expected to be able to achieve an investment grade underlying rating during the proposed timetable to price in late March and close in mid-April 2019,” wrote FDFC financial advisor Jeff Larson in a memorandum to the board released Friday.

Larson said his review of the proposed deal assumes that the new bonds will be either “nonrated or non-investment grade rated.”

Morgan Stanley & Co. will be the senior managing underwriter. The firm also underwrote Brightline’s $600 million of bonds in November 2017, which received $2.3 billion in orders from about 61 qualified institutional buyers, said Larson, president of Larson Consulting Services.

The interest rate on that deal was 5.625%, a 328 basis point spread to the 10-year U.S. Treasury. Since then, the 10-year Treasury has risen by about 34 basis points, Larson said.

Proceeds of the 2019 bonds will finance or refinance the north segment of the intercity project — the 169 miles between West Palm Beach and Orlando — fund capitalized interest, reserves, pay costs of issuance and fully refund the 2017 bonds, which are subject to a 5% early call premium.

The deal’s basic structure is expected to be multi-modal, with initial bonds going out in a initial 10-year-term mode with a yet-to-be-determined period of interest-only payments, Larson said. The size of the first bond issue will be subject to investor responses and market conditions at the time of sale, and may be less than $2.7 billion.

Bonds will be sold in minimum denominations of $100,000 to qualified institutional buyers.

Virgin Trains had initiated an IPO equity offering that was to be marketed Feb. 12. It was withdrawn Feb. 22.

Joseph Krist, a partner at Court Street Group Research, said he has often seen the municipal bond market become a source of financing for projects that couldn’t obtain funding in other ways, such as the equity markets.

“One of the things about the high-yield market in municipals has been that so many other projects have not been able to be privately financed for whole lot of reasons,” Krist said. “When that happens the next cheapest form of financing tends to be munis.”

Krist said Brightline has advertised itself as a privately owned project and has said that it makes economic and financial investment. “But for whatever reason it seems to really, really want to benefit from the lowest cost of financing,” he said.

“That raises the question — and this is a comment I’d make about so many different types of projects that have entered the municipal market — if it’s something proponents says there’s a lot of demand for, it seems to make on the face of it a lot of logical sense and yet it seems that if it doesn’t have the absolute lowest cost of financing that it can get — is the outlook questionable?” said Krist.

“You have to ask yourself why people looking for returns in the private sector, who are looking for innovative projects, why so many of those deals wind up in our market,” he said.

In high-yield deal such as Brightline is proposing, the muni market is “always going to be available to these projects sort of as a market of last resort” because it provides cheaper financing, Krist said, adding that some deals also come with additional risks.

He suggested that prospective investors consider various factors, including what could affect transportation in the future, such as autonomous vehicles that might draw customers to use such self-driving cars instead of traveling by passenger train.

Krist also pointed out that while Brightline’s 2017 deal was oversubscribed that economic conditions were different then, and an issuance this year may not attract similar results or demand.

In 2018, a partial year for start-up passenger rail service between Miami and West Palm Beach, the Larson report said that Brightline generated total revenues of about $10 million and carried 579,205 passengers. Operating and capital expenditure led to a negative operating cash flow of $88 million.

Losses in the ramp-up period were expected and covered out of the ramp-up reserve fund, the report said. Brightline was formerly known as All Aboard Florida, or AAF.

Sen. Debbie Mayfield, whose district includes Indian River County where local officials oppose the train, also questioned project costs in a newsletter to constituents on Monday.

“I find it concerning that AAF ridership and revenue reports for the Miami to Palm Beach segment have been well below projections, and recently the company canceled plans for an initial public offering after financial reports showed that the project has negative cash flow,” Mayfield wrote.

Mayfield also said she has “concerns related to the safety and cost of this project to our citizens and tax payers.” Her office is reportedly working with state officials to implement new safety requirements that were proposed in a statewide rail study last year.

Wednesday’s FDFC meeting is being held at Orlando International Airport, which is where Brightline is leasing a terminal. The company has said it expects to begin construction soon, with service beginning in 2022.

Brightline is also making plans to extend service to Tampa.

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Infrastructure Private activity bonds Transportation industry Primary bond market Sell side Florida Development Finance Corp. Florida