Judge to Consider Dismissing All Aboard Florida Bond Challenge
Posted on June 22, 2016
By Shelly Sigo, The Bond Buyer
June 22, 2016
BRADENTON, Fla. – A first-of-its-kind legal challenge over the use of private activity bonds for a private passenger train hits a milestone at the end of the month.
U.S. District Judge Christopher R. Cooper hears arguments June 30 on whether complaints from two Florida counties about the U.S. Department of Transportation's $1.75 billion bond allocation for the All Aboard Florida project should be dismissed.
The project would be the nation's first private passenger train in decades. Martin and Indian River counties, along the state's west coast where the train owners propose 32 daily nonstop trains, have cited potential harm to public services and archeological sites in separate suits filed in the District of Columbia.
Both are challenging the USDOT's December 2014 decision to award the private company the use of tax exempt bonds while federal agency environmental approvals were pending.
The bond proceeds are expected to provide half the funds for Brightline, All Aboard Florida's brand name for the $3.5 billion train service backed by Fortress Investment Group.
The AAF route will make a 235-mile link between Miami and Orlando, with stops in Fort Lauderdale and West Palm Beach.
All Aboard Florida tried and failed to privately place the unrated, uninsured deal several times last year, after the Florida Development Finance Corp. agreed to be the conduit issuer in August.
The company blamed the tight bond market, as volatility increased and high-yield investor demand dried up in the months before the Fed increased the borrowing rate 25 basis points before the year ended.
The delayed sale led the USDOT in December to grant AAF an extension of time to issue the bonds and agree to allow the debt to be sold in multiple offerings, rather than issuing all $1.75 billion at one time.
Since then market conditions have changed.
"Timing is very good for high yield issuance," Alan Schankel, municipal analyst for Janney Montgomery Scott said Tuesday.
Two recent, large transportation sector deals saw "extremely strong demand," Schankel said.
The Citi-led $844.2 million uninsured revenue refunding that priced through the New York Transportation Development Corp. on June 6 was one deal that saw strong demand, he said.
The bonds were subject to the alternative minimum tax, with proceeds going to refund debt sold in 2002 and 2005 for the American Airlines terminal project at JKF International Airport.
The BB-rated serial bonds priced to yield from 1.85% in 2017, 2.10% to 2.5% in 2019, to 2.9% in 2021 – all with 5% coupons.
A $277.5 million term bond maturing in 2026 priced to yield 3.3% and a $354.2 million term bond yielded 3.5% in 2031. Both had 5% coupons.
"The final pricing yields and spreads of the American Airlines JFK issue came in well below my expectations," Schankel said. "The 2031 maturity yield apparently received so much buyside interest, that underwriters adjusted the yield lower by 12.5 basis points on the way to final pricing."
Some of the bonds traded even higher in the secondary market, he said.
On Monday, a customer bought $50,000 of bonds maturing in 2031 at $112 to yield 2.42%. In the initial offering, the same bonds sold at $107 to yield 3.5%.
The opportunity for All Aboard Florida to issue its non-rated, uninsured bonds could be short lived, because analysts believe the economic recovery "may be stumbling," Schankel said.
To the extent the company can borrow in smaller pieces, "I suspect it would be even easier to market," he said.
All Aboard Florida didn't immediately respond to questions about its plan of finance or comment on next week's hearing in Washington, D.C.
The counties declined to comment.
Last June, Judge Cooper ruled in their federal suits that the counties didn't have standing to seek preliminary injunctions, in part because they couldn't demonstrate that the $3.5 billion train project would not be built without tax-exempt financing.
Cooper allowed discovery to proceed on requests for summary judgment sought by the counties, but ordered many details to be redacted at the request of AAF to prevent disclosure of financial information the company said was confidential.
In a redacted memorandum filed Tuesday, Martin County said the court should deny the motions for dismissal because the facts of the case have changed "materially" during the discovery process.
"Six significant areas of factual developments not previously available to the court…indicate that the project is significantly less likely to be completed without PABs," the redacted filing states.
Fortress Investment Group's stock has decreased nearly 50% since the court's June 2015 ruling, and AAF has failed to sell the bonds on four occasions, Martin County said.
"AAF's current inability to sell the PABs indicates that traditional financing is economically unfeasible," the filing continued, adding, "the overall market for project financing of junk bonds like AAF has declined significantly."
The filing also said, "AAF's rosy scenarios in its economic model have been firmly rebuffed by the investing community and press," and by Martin County's expert investment banker, William Purcell.
Martin County said documents uncovered during discovery also showed that the company's ridership projections increased by 54% in two years, from 3.5 million in a 2013 study to 5.4 million 2015.
"The puffing of the study by such massive percentage increases may be a key reason sophisticated investors balked at each of the four PAB offerings," said the filing, which attributed the quote to a June 3, 2105 email from Federal Railroad Administration Administrator John Winkle.
All Aboard Florida said it delayed issuing the bonds "in light of changed market conditions, which rendered the terms on which a deal could be concluded with investors less than optimal," according to a supplemental filing to its motion to dismiss last month.
AAF said it has spent $787 million of its own money to support its argument that the project will be developed with or without tax exempt bonds.
An upgrade of the rail line in south Florida is about 45% complete, and construction of the stations in Miami, Fort Lauderdale and West Palm Beach is well underway, according to the filing.
The design and engineering work for the Orlando Intermodal Transportation Center is proceeding, along with some construction work at Orlando International Airport.
Proposed safety improvements for 170 grade crossings have been approved by the Federal Railroad Administration, and a number of key permit applications have been filed, the company said.
"AAF is pleased to report that market conditions relative to bond financing began to improve earlier this year and are continuing to improve," the May 24 court filing said without further details.
Although the June 30 hearing is open to the public, an attorney familiar with federal court procedure said that Cooper could close a portion if arguments relate to confidential information.
Cooper could rule from the bench on the motion to dismiss, although there is no timeframe for a decision to be handed down.
If he decides against dismissal, the cases would proceed to a determination on the summary judgment sought by Martin and Indian River counties.
AAF has said that Brightline passenger service between Miami and West Palm Beach will start in mid-2017, and that service to Orlando will begin in late 2017.
Martin and Indian River counties have also mounted three unsuccessful legal challenges in state court attempting to overturn the Florida Development Finance Corp.'s agreement to serve as the conduit for AAF's bonds.