Fortress-Backed Brightline Rail Sells $770 Million of Debt at Steep Yields

Romy Varghese, Bloomberg News

A Brightline passenger train stops at the Fort Lauderdale station during its inaugural trip from Miami to West Palm Beach on May 11, 2018 in Fort Lauderdale, Florida. , Photographer: Joe Raedle/Getty Images

(Bloomberg) -- Brightline Holdings, the rail company backed by Fortress Investment Group, sold $770 million of unrated tax-free debt with hefty premiums for investors as it raises cash critical for the expansion of its underperforming Florida system.

The securities, subject to a mandatory put in October 2023, priced with a 7.25% coupon at 98 cents on the dollar, according to pricing wires viewed by Bloomberg. The primary collateral is funds from Miami-Dade and Broward counties in exchange for using the rail line for their commuter services. Those agreements are expected to be finalized next year.

Brightline is building a 168-mile extension to Orlando International Airport. It recently pushed back the completion of the project to 2023. Once in service, the stop is expected to supercharge ridership to 7.9 million by the end of 2025, compared with 1.29 million this year on the three-station line currently running only between Miami and West Palm Beach.

Investors could bank on a yield of 12.7% at the mandatory put in 2023, under the terms that tender the bonds at 104 cents on the dollar and in current market conditions. Optional calls at lower premiums can occur before the mandatory date. The terms helped increase the size to $770 million from $760 million in earlier pricing wires, although still short of the initial $785 million sought in offering documents.

“The pricing reflects the higher than normal risk of the credit given how much still needs to be built and how much demand needs to grow,” said Daniel Solender, head of municipal securities at Lord, Abbett & Co., who declined to comment on whether the firm bought any of the bonds.

The country’s first new privately financed intercity passenger rail in a century, launched in 2018 along Florida’s east coast, missed passenger and revenue forecasts even before the onset of the Covid-19 pandemic. Brightline is now adding more stations and finalizing the commuter rail initiatives with Miami-Dade and Broward counties to increase ridership and revenue.

Some of Brightline’s existing bonds traded at higher yields following the company’s filing about the delay in completing the Orlando stop, key to meeting its targets. This deal “will ease any concerns” about finishing that station, said John Miller, head of municipals at Nuveen, the biggest holder of Brightline debt, which declined to comment on whether it bought any of the new bonds.

“The monthly disclosure had some disappointments in it, which I think are going to prove short-term in nature,” he said. “With the growth in Florida and the area around these routes, they need a smaller and smaller market share to have the financing make sense.”

Miller also pointed to Fortress’s equity contribution -- $2.2 billion for the $6.6 billion project -- as demonstrating its commitment to the rail.

The new deal also comes at a time when investors have pulled a record $11.5 billion from municipal high-yield funds year-to-date, according to Refinitiv Lipper US Fund Flows data.

“Our flows have been spotty at best, so no great incentive to be involved,” said Jim Colby, portfolio manager at VanEck, which owns some Brightline debt and passed on the new offering.

The company’s line will ultimately extend to Tampa from Miami for a total of 320 miles (515 kilometers). Brightline is also planning a line connecting Las Vegas to southern California.

(Updates with size in first paragraph)