Florida Train Presses On Despite Market's Cold Shoulder

Posted on December 16, 2015

By Shelly Sigo

BRADENTON, Fla. - All Aboard Florida says it remains on track to offer private passenger train service in 2017 even though it was unable to issue $1.75 billion of bonds this year amid turmoil in the high-yield market.

The company has asked the U.S. Department of Transportation for a second extension of the authority to issue the non-rated, tax exempt bonds.

A credit committee will consider the request before the year ends, an agency official said.

The USDOT initially approved the private activity bond allocation – its largest ever – in December 2014, ordering the bonds to be issued by July 1. The agency later granted a six-month extension requiring the debt be issued by Jan. 1.

The request for an extension provides All Aboard the "flexibility to structure financing in a way that serves the best long-term interest of our business," Mike Reininger, president of All Aboard Florida, told the Palm Beach Post.

AAF, which recently named its planned train service Brightline, is developing the project between Miami and West Palm Beach using the existing Florida East Coast Railway freight rail corridor.

A new spur will be constructed to provide service between West Palm Beach and Orlando International Airport.

"We remain committed to delivering service from Miami to Orlando and have made significant advancement with our construction to begin Brightline operations in 2017," a company spokesperson said Wednesday.

All Aboard Florida and Florida East Coast Industries are owned by Fortress Investment Group.

AAF has tried to sell its $1.75 billion of bonds to qualified institutional buyers and accredited investors since the Florida Development Finance Corp. formally agreed to be the conduit issuer in August.

The offering was on the street for several months before it was placed on Ipreo's Dalcomp negotiated calendar for pricing on Nov. 10, according to market sources.

The Nov. 10 transaction pricing was postponed without explanation.

In addition to deteriorating conditions for high-yield issuers late in the year, including a shrinking investor base, some market experts said the deal encountered questions about AAF's financial profile, including the company's proposed $100 one-way ticket for the full 235-mile ride between south Florida and Orlando, according to a ridership and revenue study AAF filed in U.S. District Court in Washington, where two counties along the route are challenging the PAB allocation.

The company expects ticket sales to account for approximately 91% of passenger rail revenue starting in 2020, the year operations are anticipated to be stabilized, according to a preliminary limited offering memorandum released in August.

The outlook for unrated, high-yield bonds going forward could be troublesome because analysts have begun recommending that investors raise the credit quality of their portfolios.

"While high-yield can be a key holding in many well-diversified investment portfolios, we believe that investors should avoid overexposure to this bond sector," Wells Fargo Investment Institute said in a Fixed Income Market Update Tuesday.

Wells Fargo said that it moved to an underweight position in high-yield bonds on Aug. 24 due to its expectation for continued volatility stemming from liquidity concerns, lower oil and commodity prices, and market reverberations from the normalization of monetary policy by the Federal Reserve.

As expected on Wednesday, the Fed raised its target for the federal funds rate by 25 basis points, which will translate into higher capital borrowing costs and increased debt service for municipal bond issuers, said Moody's Investors Service.

Opponents of the train project said AAF's inability to market the bonds indicates that its prospects are not rosy.

"The fact that AAF was unable to sell its bonds has prompted them to ask for a second extension from the USDOT," Brent Hanlon, treasurer of Citizens Against Rail Expansion, said in a statement. "This is a reflection of the project's weakness."

The company "touted these bonds as very attractive to investors," he said. "Apparently that has turned out not to be the case."

The fact that All Aboard is seeking a second extension to issue the bonds demonstrates that the company "seems to be desperately seeking financing," said K.C. Traylor, who founded the group called Florida NOT All Aboard in early 2014.

"It also appears AAF is having great difficulty finding bond buyers who believe this is a worthwhile investment," she said.

Traylor, who lives on the east coast in Martin County where the Brightline trains will speed through without stopping, said her organization has obtained the signatures of more than 58,000 people on a petition opposing All Aboard Florida.

Their concerns about the 32 passenger trains a day, in addition to existing FEC freight trains, include traffic congestion, air and noise pollution, lower property values, and restrictions on boater access to the ocean, according to the group's website.

Some of those same concerns are among reasons that Martin and Indian River counties earlier this year filed the first-ever legal challenge to a private activity bond allocation by the USDOT.

The suits are still pending.

U.S. District Court Judge Christopher R. Cooper has ordered motions to dismiss the cases to be filed by Jan. 19. Replies by the counties, the USDOT, and All Aboard Florida as intervenor are due by Feb. 12.

Both counties want Cooper to block the issuance of the $1.75 billion of private activity bonds.

Indian River County contends that the bond allocation violated the National Environmental Policy Act.

Indian River's suit was filed in April before completion of the final environmental impact statement for All Aboard Florida's project.

The document was later released by the Federal Railroad Administration in August, a day before the Florida Development Finance Corp. agreed to issue the bonds.

Typically, the NEPA process concludes with the issuance of a record of decision by agency officials, signaling formal approval of a project. Once an ROD has been issued, the environmental impact statement can be challenged in court.

Without the record of decision, some opponents of the project have expressed frustration that work on the passenger train project continues, although they cannot bring suits to challenge the environmental review.

The USDOT would not state when – or if – it will issue a record of decision.

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