Heat is on Brightline West train as mandatory call date looms

Brightline’s plan for the country’s first high-speed electric train is facing pressure from an impending mandatory call on $2.5 billion of bonds amid an effort to assemble the capital necessary to pay for the massive West Coast project.

A similar strain faced its companion project in Florida, which in August refinanced nearly $1 billion in bonds just under the wire, with additional perks for bondholders who agreed to roll the debt.

The financing challenges facing both Brightline projects, which represent some of the most liquid and prominent names in the high-yield municipal market, have translated into falling bond prices.

Bondholders are in talks with Brightline West and have hired the same law firm, Herbert Smith Freehills Kramer LLP, that represented them in negotiations with Brightline Florida, according to market participants.

HSF Kramer hosted a call Tuesday afternoon to discuss Brightline West, telling investors that negotiations are “moving in a positive direction,” said a bondholder who asked to remain anonymous. “Everything is progressing but there’s nothing tangible,” the bondholder said.

Many of same investors participated in August refinancing of $985 million of the Florida line’s so-called commuter bonds.

“Everyone is familiar with each other through dealing with the commuter bonds,” the investor said. “On paper they’re two different credits, but it’s the same cast of characters and a lot of the funding sources are the same.”

First Eagle Investments, BlackRock, Invesco and Alliance Bernstein are large Brightline West holders. First Eagle, Nuveen, Invesco, BlackRock and Macquarie are among the largest Florida holders.

“The main difference between the West and the East is that there’s a lot more and smaller bondholders in the West, so what they’re trying to avoid is having a faction of a smaller bondholder group organize and impede negotiations,” the bondholder said.

Like with the Florida bonds, where bondholders won several fresh security liens and a higher yield, the call-date deadline gives bondholders some leverage, investors said.

“They do have the issuer by the tail and can pull in different directions because they’re looking to keep this project viable,” said Jeff Timlin, a managing partner at Sage Advisory Services. “Bondholders can dictate some terms, but the ways things are going, it’s going to require a pretty big turnaround.”

Sage previously owned Brightline Florida taxable bonds but sold them to avoid what Timlin said was a “risk profile that was just too great for what our clients would be comfortable with.”

DesertXpress Enterprises LLC, which does business as Brightline West and is owned by Fortress Investment Group, aims to own and operate the nation’s first privately owned, all-electric high-speed train, which would run between Las Vegas, Nevada and a suburb of Los Angeles, Calif.

Fortress-backed Brightline Trains Florida LLC owns and operates a $6 billion, 235-mile train system from Miami to Orlando that marks the nation’s only private passenger intercity express system.

The Florida train is up and running, while Brightline West remains in the early stages, with a price tag that recently has ballooned to $21.5 billion from $16 billion. 

Brightline West sold the $2.5 billion of private activity bonds in February. The terms gave the owner 180 days, with an additional extension, to secure additional funds or face a mandatory bond redemption at 101 plus interest. The call date is mid to late November.

The deal also called for the company to nail down a $6 billion bank facility and $1 billion of equity. Last month, the train applied for a $6 billion federal Railroad Rehabilitation and Improvement Financing Loan that would replace the bank loan and told Bloomberg it would seek $5.5 billion of equity.

Brightline West did not respond to request for comment.

Prices on bonds for both projects have tumbled in recent weeks.

Roughly $9.5 million of Brightline West senior subordinated California bonds with a 9.5% coupon due in 2065 traded at 74 cents on Tuesday. That’s down from 87 on Oct. 1 and 101 on March 5.

Barclays, in an Oct. 10 client note, said the Florida so-called opco bonds, which are uninsured, have declined recently and are now “trading close to where Brightline West bonds are trading at the moment.” The bonds wrapped by Assured Guaranty are also trading below par, the bank noted, adding that the “chunky coupon” bonds represent a good buy.

“There is much uncertainty at the moment and a lot of moving parts in the whole Brightline complex,” Barclays said. “Trades might be quite risky, but buying wrapped Brightline East bonds seems quite attractive to us, as they trade slightly below par, with spreads of 125bp over MMD, and they are supported by the insurance guarantee,” the firm said. “There is not much price appreciation in the trade, but it provides a nice carry.”