Brightline bondholders: all eyes on Aug. 13 repayment deadline

It’s been a rough few months for one of the high-yield municipal market’s most prominent credits.

In May, Brightline Florida suffered a series of ratings downgrades due to underperformance, and in July, the company raised red flags by deferring a bond interest payment. Now, skittish Brightline investors are waiting to see how the company handles an Aug. 13 deadline for a nearly $1 billion bond repayment.

Some bondholders have retained Herbert Smith Freehills Kramer LLP, formerly Kramer Levin, ahead of the approaching mandatory redemption, as first reported by the Wall Street Journal.

Others remain in the dark, waiting to see whether a planned $985 million borrowing to pay off the redemption on the so-called commuter bonds remains on the calendar for this week, or if the company will look for another option. All bondholders would have to sign off on a waiver for an extension or another alternative, said a bondholder who holds the commuter paper.

Underwriter Morgan Stanley has been “unusually quiet” in the last few days after canvassing bondholders for potential orders last week, the holder added.

“I don’t know how much of a book they have,” said the investor. As of Tuesday, the deal remained on the week’s calendar but without a date. Morgan Stanley declined to comment.

One of the most closely followed credits in the high-yield municipal bond market, Brightline Florida owns and operates a 235-mile intercity high-speed passenger rail service connecting Miami to Orlando, with plans for an extension to Tampa. The company’s complex $5.5 billion debt stack includes several liens, taxable and tax-exempt structures and separate holding, operating and parent company entities.

Fitch Ratings and S&P Global Ratings in May downgraded Brightline Trains Florida LLC $2.22 billion senior secured tax-exempt private activity bonds — the so-called opco debt — to BB-plus from BBB-minus, and downgraded Brightline East LLC’s $1.12 billion in senior secured taxable notes — so-called parentco debt — to CCC-plus.

The latest downgrade came Tuesday from Kroll Bond Ratings Agency, which dropped $2.2 billion of the opco debt to BB from BBB, with a negative outlook. Roughly $1.13 billion of the bonds carry insurance from Assured Guaranty Inc. and are rated AA-plus/stable. Kroll also cut the senior secured taxable notes to B-minus from B-plus with a negative outlook.

The $985 million Aug. 13 redemption is for the commuter bonds, which carry an 8.25% coupon, 2057 maturity and an embedded $104.25 mandatory put. The company has rolled over the debt several times while it negotiates with southern Florida counties to develop commuter services along Brightline’s corridor in exchange for payments.

In another pressure point, the Florida East Coast Railway last month sued Brightline saying the commuter service violates existing agreements and threatens its freight operations, according to local reports.

First Eagle and Nuveen are among the largest holders of Brightline bonds, including the commuter debt, which accounted for First Eagle’s largest holding as of June 30.

A chunk of Brightline’s 12% subordinate bonds — which had the deferred interest payment — make up First Eagle’s second-largest holding.

A First Eagle spokesperson referred questions to Herbert Smith Freehills Kramer LLP.

The largest holders of the debt, according to Morningstar: First Eagle’s high yield and short-duration high yield funds; Nuveen’s short-duration high yield fund; Macquarie’s national and tax-free intermediate funds; two iShares ETFs; and Invesco Rochester High Yield Municipal ETF.

The funds that have large Brightline positions have been among the worst-performing funds in the high-yield muni Morningstar Category since Brightline said it would defer its July 15 interest payment, Morningstar said. “That’s too short of a time period by which to judge a strategy, but it does highlight risks some of these funds have taken by concentrating on the debt supporting these projects.”

The bondholders who hired HSF Kramer appear to be in talks with the company, but other holders remain in the dark, said the bondholder who owns some commuter bonds.

“We’ve combed through the documents and it appears they need all bondholders to consent to an extension, but I don’t know because there’s been no communication,” said the investor.

It’s clear the majority holders are “driving the bus,” the investor added. “You know you’re just along for the ride, but we’re trying to find out if our interests will always be aligned or if there’s a possibility they can cut some kind of side deal.”

Municipal Market Analytics speculated in a Monday note that the July 15 deferred payment may not have been a surprise liquidity shortfall but instead a “familiar Fortress playbook: using deferral (or other opportunistic situation) to catalyze a restructuring on sponsor-friendly terms,” MMA said.

The move by some holders to hire counsel signals “preparation for a potential restructuring or legal dispute,” MMA added.

Nuveen, Brightline and Assured Guaranty did not respond to requests for comment. Invesco declined to comment.

Jessica Lerner contributed to this report.