Florida county mounts new legal challenge to Brightline/Virgin Train bonds
Indian River County, Florida, will appeal the latest legal defeat in its crusade against a privately owned passenger rail line that plans to run trains through its jurisdiction.
County commissioners voted 4-1 Tuesday to spend up to $400,000 to appeal the denial of the county’s motion for summary judgment in a federal lawsuit it filed to challenge the Brightline project’s $1.15 billion of private activity bonds and federal agency environmental approvals.
Commission Chairman Bob Solari said the appeal is necessary to prevent Brightline, soon to be renamed Virgin Trains USA, from using the PABs and potentially from getting a low-interest Railroad Rehabilitation and Improvement Financing loan.
“To me the weakest spot of Virgin Trains’ game plan is the financing,” Solari said. “They are not getting financing from the private sector, so they’ll depend upon financing directly subsidized from the taxpayers and I think that’s the worst part of this program.”
Brightline declined to comment on Indian River County’s decision to file the appeal.
The train company has until June 30 to issue the tax-exempt PABs, according to a deadline set by the U.S. Department of Transportation. The company reportedly planned to issue the debt through the Florida Development Finance Corp. in January.
However, Indian River County filed a complaint in Florida state court on Jan. 16 asking a judge if it must pay for railroad crossing improvements and costs required by the passenger train project.
The pending legal issues and current market volatility could make it difficult for a fledgling project such as Brightline to issue the PABs, according to municipal strategist Alan Schankel, managing director for Janney Montgomery Scott LLC. Schankel said he has not followed the financing of Florida’s passenger train project.
“Generally, I think investors are becoming more cautious, particularly in the high-yield area, and are taking more care to cross T’s and dot I’s in their analysis,” said Schankel. “That suggests to me that these legal issues will need to be clarified or resolved before further bond sales.”
If investors use the corporate bond market as an indicator, they are being more cautious now, Schankel said.
Corporate high yield spreads averaged 366 basis points in 2017 and 352 basis points in 2018, then hit a 3.5-year high of 537 basis points on Jan 3, 2019, he said. Since Jan. 3, spreads have improved to about 411 bps.
“I think high-yield corporate spreads are a general indicator of the cost of risk,” Schankel said. “I can’t say all muni portfolio managers and investors look at corporate spreads, but the better ones should consider corporate spread as one element of quantifying risk.”
Brightline, formerly All Aboard Florida, previously issued PABs to finance portions of the Miami-to-West Palm Beach segment after winning the first federal lawsuit brought by Indian River and Martin counties in May 2017. The ruling favored AAF because the bond proceeds were not going to be spent on projects related to either county.
Clearing that legal hurdle, AAF on Nov. 30, 2017 priced $600 million of variable-rate tax exempt PABs. The deal received nearly $3 billion in orders from qualified institutional investors and sold with a speculative rating of BB-minus from Fitch Ratings.
Morgan Stanley priced the deal at par as a bullet maturity in 2047 to yield 5.625%. It included a 10-year PUT date.
Fitch has since withdrawn its rating because Brightline’s strategic focus has expanded to include new developments.
After the first PABs were sold, the FDFC agreed to be the conduit issuer for an additional $1.15 billion of private activity bonds. Proceeds will be spent on the segment of the train’s route that runs through the two counties.
After FDFC agreed to issue the bonds, Indian River and Martin counties filed a second federal suit arguing that Brightline wasn’t eligible for the PAB allocation, and that federal agencies botched the project’s environmental reviews. Martin County eventually entered a settlement with the train company and withdrew from the suit.
Indian River County continued to pursue the legal challenge, and on Dec. 24, 2018 Federal Judge Christopher Cooper granted motions for summary judgment sought by the USDOT and Brightline, a ruling that cleared legal obstacles for the PABs at the federal district court level.
The county’s appeal of Cooper’s ruling will be heard by the U.S. Court of Appeals for the District of Columbia Circuit. The notice of appeal was filed Jan. 14 only to preserve the county's appellate rights until commissioners could hold a public hearing and vote on whether to pursue it Tuesday.
Although the litigation doesn't directly involve a federal Railroad Rehabilitation and Improvement Financing loan, the project’s authorization under the National Environmental Policy Act is required for a loan to be approved. It’s the reason some speakers on Tuesday objected to what they called “subsidized” public financing for the project.
The county’s federal complaint contends that NEPA was violated when environmental approvals of the project were granted.
All Aboard Florida - Operations LLC is applying for RRIF loan to help finance portions of the Brightline project from Miami to Orlando. The loan amount hasn’t been disclosed, but the company estimated the project’s cost at more than $3.7 billion.
Brightline passenger train service began operating between Miami and West Palm Beach last year. Company officials have said construction on the second phase from West Palm Beach to Orlando will start soon. The segment will pass through Indian River County along the state’s east coast.
The county has objected to the train project since it was announced, citing safety and cost issues at 31 at-grade railroad crossings. Eventually, 32 trains a day will travel through the county at speeds up to 110 mph without stopping.
Paul Wescott, a local attorney who said he recently got involved in opposing Brightline, encouraged county commissioners to pursue the appeal Tuesday.
“Starving this train of the oxygen, of [the] money, has to be our primary objective and I think this litigation helps us to that end,” Westcott said. “At some point and time we’re going to see in our future that this bond funding, these efforts to obtain money from the public sector, are going to set up the argument that this train is too big to fail and as a result we are all going be paying for it again later.”
Westcott said the bond financing and loans being sought by the private owners of Brightline amounted to “corporate welfare.”
“We may be David and they may be Goliath, but that story had an ending,” he said.
A representative of a new grassroots anti-train organization called the Florida Alliance for Safe Trains also supposed the county’s appeal. Many of its members are from Indian River and Martin counties, according to the group’s leader, Susan Mehiel.
The alliance is registered in Florida as a C corporation, and is in the process of filing for tax-exempt status, said Mehiel, who has produced an online publication called “Train Wreck Times” opposing Brightline.
“Our mission is to educate the community and elected officials regarding the many issues of railroad transportation in the state of Florida,” Mehiel told The Bond Buyer.
In a recent introductory email, the Alliance said, “We are now bigger, bolder and stronger than ever and we’re here to stop a train!”
Indian River County will be represented in its appeal by Philip Karmel, an attorney with Bryan Cave LLP, who specializes in regulatory, environmental and land use issues.
The appeal comes as Brightline plans to cement its new name, Virgin Trains USA, in the equity markets with an initial public offering as another way to finance the continued expansion of the private passenger train system. The company entered into an agreement with British billionaire Richard Branson’s Virgin Group in November. Virgin agreed to make a minority investment in the project.
The IPO launch announced Jan. 30 and kicked off underwriters’ road show presentations for the issuance of 28.3 million shares of common stock at $17 and $19 per share. The initial offering is expected to raise between $468 million and $540 million, depending on the price of shares.
Fortress Investment Group LLC will retain majority ownership of the train company. The company will transition its consumer facing brand to Virgin Trains USA during this year.
Indian River County’s decision to appeal the federal lawsuit is part of a multi-prong strategy.
The county also filed a complaint Jan. 16 asking a state judge to determine who is liable for funding railroad crossing improvements that will be needed to support Brightline’s 32 daily trains.
The lawsuit will determine if Brightline can benefit from the county’s 31 at-grade highway crossing agreements with Florida East Coast Railway. FECR, a freight railroad that granted Brightline an easement to use its tracks, is owned by Grupo Mexico. The Brightline project began when it and the FECR were under the common ownership of Fortress Investments. The freight carrier was sold in 2017.
The county said it hasn’t agreed to make any changes in its crossing agreements with FECR that would also allow Brightline to use the tracks. Both Brightline and FECR are named in the suit.
Indian River County is also lobbying state lawmakers this year to adopt new regulations for passenger trains based on a study released in November by the Legislature’s Office of Program Policy Analysis and Government Accountability.
The Florida Passenger Rail System Study found gaps in state regulations that are specific to higher-speed rail operations that could be regulated by the Florida Department of Transportation such as railroad crossing design requirements for “higher-speed” operations between 81 mph and 125 mph — speeds at which Brightline is expected to operate.
The study recommended that the state clarify FDOT’s mandate concerning oversight of passenger rail with respect to maintenance, safety, revitalization, and expansion.