Virgin Trains USA name will make its first muni market appearance

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The Virgin Trains USA name makes its debut in the bond market next week to finance the privately owned Florida passenger train after a name change from Brightline, under which its first $600 million of debt was issued.

The $1.5 billion unrated private activity bond deal will be sold to qualified institutional buyers under Rule 144A of the Securities Act of 1933, in minimum denominations of $100,000.

Next week’s deal will give qualified bondholders a chance to pick up yield by taking on risk in a market with supply so low that even low-investment-grade issuers like Chicago have been able to trim yields.

The deal for Florida’s fledgling “higher-speed” intercity passenger train was initially expected to price this week before being pushed back to the week of April 1. The train is considered "higher-speed" because it will operate at speeds up to 110 mph, above the standard Federal Railroad Administration standard of 79 mph for passenger trains but below "high-speed" rail, which can reach up to 150 mph, as defined by the Internal Revenue Service.

The tax-exempt bonds will be sold by the Florida Development Finance Corp., a statewide conduit issuer, on behalf of Virgin Trains. The company announced plans to rebrand from Brightline, the name it used to begin operations between Miami and West Palm Beach in 2018, after Britain's Virgin Group announced plans in November to take a small stake in the operation. Before construction started, it was known as All Aboard Florida.

The company is owned by Florida East Coast Industries. FECR is owned by Fortress Investment Group LLC, which was sold to Japan’s SoftBank Group Corp. in December 2017.

Proceeds will pay or reimburse costs for building the 236-mile passenger rail line between Miami and Orlando, refund $600 million of PABs issued in 2017, pay capitalized interest, fund reserves, and pay issuance costs.

The bonds will be secured by a first priority lien on assets that include revenues, passenger rail easements, stations, rolling stock, leasehold interests, reserve funds and a pledge of the equity interest of the borrower, according to an internet roadshow presentation.

Final maturity of the debt will be in 2049, although there will be mandatory tender dates in 2026 and 2029, and a make-whole operational redemption call provision.

Company officials declined to comment on the deal, and referred to the preliminary limited offering memorandum.

The offering memorandum discloses ongoing litigation filed by Indian River County challenging the PABs and environmental approvals for the project. The county has also filed a lawsuit in state court asking a judge to determine if the county has to pay for crossing upgrades required because of the project.

Still in its ramp-up stage, the train began running between Miami and West Palm Beach in May 2018. In February, it carried 78,707 passengers and generated about $1.9 million in revenue. Compared to January, the company said ridership in February increased by 7% and total revenue grew by 14%.

All permits and contracts are in hand to start building the West Palm Beach to Orlando segment, President Patrick Goddard said in the roadshow presentation. He also said last November’s partnership with British billionaire Richard Branson’s Virgin Group will be “meaningfully accretive” for the business.

“The Virgin brand has 97% brand awareness in the United States and we believe cross marketing opportunities with Virgin Atlantic, Virgin Voyages, Virgin Hotels, and Virgin Holidays will a make a meaningful impact on our ridership and ramp up,” he said.

For now, the Brightline name is still on trains and stations. The change to Virgin Trains USA will be done this year. The company is also in negotiations to lease right of way to extend service to Tampa.

The Trump administration has also signaled its approval of the company and train project by authorizing three allocations of PABs through the U.S. Department of Transportation’s Build America Bureau: $600 million of bonds sold in 2017 that will be refinanced in the upcoming deal; $1.15 billion awarded in December 2017; and an additional $950 million allotted March 15.

Collectively, the $2.7 billion of federal PABs is the highest amount ever awarded to a single issuer and it may be the first time such borrowing has gone to a project owned by a foreign company. Other projects that received PABs in the USDOT program appear to be sponsored by local or state governments, though many of them take the form of concession agreements with foreign finance and contracting firms.

The company had also applied for a $950 million low-interest loan from the Railroad Rehabilitation and Improvement Financing Program, but the application was withdrawn on March 6.

Along the east coast, from Miami to Cocoa, the train will operate via easements on tracks operated by Florida East Coast Railway, which was acquired by Grupo Mexico in June 2017. From Cocoa to Orlando International Airport 40 miles of new track will be built.

The company said it soon will have invested $1.65 billion of equity in the project.

In February, Virgin Trains unsuccessfully attempted to raise about $500 million through an initial public offering, some of which was to be used to acquire the acquisition of XpressWest, an undeveloped high speed rail project to link Victorville, California, with Las Vegas. The IPO was withdrawn Feb. 22 after some analysts questioned the value of the stock, which was expected to price at $17 to $19 per share.

Although the purchasing restrictions are designed to limit the buyer audience to investors in a position to absorb riskier debt, Court Street Group Research's Joseph Krist says retail investors can also be exposed to it through high-yield municipal funds.

The project’s struggle to obtain financing in the capital market raises questions about its viability, a point that should concern retail investors in such funds municipal high-yield funds, said Krist, a partner at Court Street.

The company that manages the fund is the qualified institutional buyer, Krist said, and that gives retail investors access to bonds earmarked for purchased by qualified institutional buyers.

“There’s nothing to prevent a retail investor from buying shares in one of these funds, nothing to sign, no certain level of wealth,” he said. “But the whole issue, which only comes up with things go bad, is what was in this fund to make it attractive to a high yield fund investor?”

There are an “awful lot” of individuals who should care if they’re investing in a municipal high-yield fund and should understand the risk associated with it, Krist said.

While the passenger train is widely supported in many counties along the route, residents along portions of the east coast have raised concerns about the train speeding through their downtowns, said Susan Mehiel, head of the Florida Alliance for Safe Trains.

Mehiel said the bulk of her organization's followers live in Brevard, St. Lucie, Indian River, and Martin counties, which are in the segment yet to be built between West Palm Beach and Orlando. No stops are planned in those counties so the train will run at speeds up to 110 mph.

Some of the Alliance’s concerns involve ambulances being delayed from reaching hospitals, while others involve fatalities. At least 17 people have been killed since Virgin/Brightline began operating; some involved vehicles driving around crossing safety arms and some were determined to be suicides.

“With the 17th death on the Virgin Train tracks this week and the revelation that for the last six years the Florida Department of Transportation has shirked its duty to regulate higher speed trains, we think it is time someone in Tallahassee did something to protect the residents of Florida,” Mehiel said Friday.

Mehiel said her group is asking Gov. Ron DeSantis “to immediately direct the new secretary of transportation to develop regulations for higher speed trains.”

It remains to be see how persuasive the safety argument is in a state that tolerated an average more than 8.4 traffic deaths every day last year.

Some people told the Florida Development Finance Corp. at a March 6 meeting that they don’t believe the project is feasible, and that the FDFC shouldn’t approve the bonds.

Indian River County Attorney Dylan Reingold said Friday that the ridership numbers and financial information released by the company support his claims that the project isn’t meeting its own ridership projections.

Reingold also said ridership for January and February is below those the company reported in November and December “and thus baked the December 2018 ridership numbers into January 2019 and February 2019 in an attempt to mask what is actually a decline in ridership.

“In reality the 2019 numbers so far indicate that the ridership will be less than one million as compared to the 2.1 million riders predicted in the bond documents,” he said. “And I am sure Brightline is preparing how to deal with the fourth-quarter financial numbers that are due to come out next week.”

The company has said that some of the higher numbers reported at the end of last year were due to special events and other holiday activities.

Ultimately, operations to Orlando will be the first meaningful test of the market the firm sees for intercity train travel, as opposed to the short hops it is running now between Miami and West Palm Beach.

The FDFC will hold another meeting April 5 in Orlando to consider issuing the company’s newest allocation of PABs, the $950 million approved by the USDOT March 15.

The exact date of the upcoming bond deal is unknown. A portion of it will refinance the $600 million sold in 2017. It was sold to qualified institutional buyers at an interest rate of 5.625%.

Morgan Stanley, the underwriter for that deal and the upcoming issuance, said the 2017 deal received $2.3 billion in orders from about 61 qualified institutional buyers.

Chicago-based Nuveen holds $505 million of the $600 million in outstanding bonds, according to Bloomberg, which also said Nuveen is interested in the upcoming deal.

Greenberg Traurig PA is bond counsel for next week’s deal. Mayer Brown LLP is underwriters’ counsel.

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