Morgan Stanley sued over Brightline deal by private equity firms

Morgan Stanley’s desire for future municipal bond business from high-speed rail operator Brightline Holdings drove the bank to lie about terms of a key credit agreement, a pair of private equity firms claimed Monday in a lawsuit filed against the bank and Brightline in a New York court.

Certares Management LLC and Knighthead Capital Management LLC claim that Morgan Stanley illegally and secretly restructured the credit agreement for Miami-based Brightline, which is owned by Fortress Investment Group. The investors are seeking at least $750 million, which includes a disputed make-whole payment that’s at the heart of the claims.

Morgan Stanley has acted as Brightline’s underwriter on a series of muni bond transactions the company has brought to market over the last several years to finance its two major high-speed train proposals. The company is in the midst of developing a $12 billion high-speed line between California and Nevada, which would be funded by a mix of federal grants, private equity and municipal bonds.

Brightline already operates a line in Florida, which represents the nation’s first privately owned fast passenger rail. The $6 billion project was financed in part with $3.75 billion of debt.

The lawsuit charges that in late 2022 and 2023, the private equity firms decided to invest $280 million in a credit agreement in part because of an attractive make-whole provision that would guarantee them an additional payment if the underlying loan were repaid early. The bank and Brightline then violated the agreement with “a series of wrongful acts apparently designed to escape the obligation to pay the plaintiff funds the make whole amount,” the lawsuit said.

Morgan Stanley was motivated to defraud the investors in part because it wanted to “position itself for future lucrative investment-banking business with Brightline Holdings and its private-equity owners at Fortress, including through handling municipal debt transactions for Brightline Holdings which could generate sizeable fees for Morgan Stanley,” the complaint said.

Brightline and Morgan Stanley said the lawsuit has no merit. A Brightline spokesperson called the complaint “completely baseless,” and a Morgan Stanley spokesperson added that the firm would “defend itself vigorously.”