(Bloomberg) -- Brightline, the first private US passenger railroad in more than a century, obtained investment-grade ratings on its proposed senior municipal bonds ahead of a planned $3.6 billion debt refinancing. 

S&P Global Ratings assigned a preliminary BBB- rating, its lowest investment grade, to $2 billion of tax-exempt Brightline bonds. The bonds are likely to be issued this month by the Florida Development Finance Corp. Brightline expects Assured Guaranty to insure $1 billion of the tax-exempt debt. 

The Fortress Investment Group-backed railroad, which started long-distance service between Miami and Orlando in September, also plans to sell $1 billion in speculative-grade corporate bonds yielding in the high-single to low-double digits, Bloomberg previously reported. Another $1.6 billion of debt and equity could come from Fortress or other investors. 

Morgan Stanley is leading the new issue sale of revenue bonds, according to preliminary offering documents dated April 2.

The bonds also received preliminary designations of BBB- from Fitch Ratings and BBB from Kroll Bond Rating Agency. The investment-grade ratings and bond insurance should broaden the market for the higher-speed rail line’s municipal debt and lower its borrowing costs, market watchers say. Brightline’s current muni-bond debt is unrated. 

“The preliminary rating reflects that the project is a first-of-its-kind rail system,” S&P said in a release dated Tuesday. “It is fully exposed to ridership risk and operational risks.”

Ben Porritt, a Brightline spokesman, declined to comment.

The train service, which carried about 230,000 passengers in February, began its short distance service between Miami and West Palm Beach in 2018. Brightline carried 2.1 million passengers in 2023 and currently forecasts ridership on its more lucrative long—distance service will rise to 4.3 million in 2026 while its commuter rail will carry 3.7 million.

Breathing Room

Brightline is betting on replicating the model of Amtrak’s high-speed Acela service in the Northeast with better amenities. The railroad says travelers between Miami and Orlando — both big tourism destinations and business centers — can avoid the stress of a traffic-clogged four- to five-hour drive as well as the hassles of air travel.

The rail service makes the trip in 3 hours and 30 minutes, reaching speeds as high as 125 miles per hour. 

In addition to paying off Brightline’s currently unrated senior tax-exempt bonds and taxable debt, proceeds will fund almost $550 million in reserves, which S&P sees cushioning against potential ridership and revenue declines, as well as servicing debt for 12 months. 

The refinancing — excluding $985 million of subordinate muni bonds — will give Brightline some breathing room, allowing it to extend the ramp-up of operations to 2028 from 2026, according to S&P.

After the ramp-up period, S&P projected in its base case that Brightline will have almost 2.7 times the revenue to cover debt service in 2030 or as little as 1.4 times in its downside case. S&P’s base case assumed revenue forecasts at 38% to 55% below Brightline’s projections and 52% to 71% lower for its downside case.

Brightline estimated the market for long-distance trips by residents and visitors between South Florida and Central Florida was about 35 million in 2019, with 99% traveling by car, and would grow to more than 38 million in 2026.

Brightline has seen a 50% increase in bookings between October and January, driven primarily by a growing repeat customer base, according to S&P. Still, Brightline has cut its 2024 ridership estimates by 30% to about 5 million, citing delays in the opening of the Orlando line. 

“The local target population has historically had a propensity to travel by car,” S&P said. “But we view that given the increases in bookings and the revenue to date that Brightline should at least achieve our base case forecast.” 

--With assistance from Skylar Woodhouse.

(Updates with context throughout, including details of new issue deal in fourth paragraph.)

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