Feds loosen requirements on selling AAF bonds, but railroad still faces jittery markets, skeptical investors
Posted on February 26, 2016
By Lisa Broadt
All Aboard Florida may have an easier time selling $1.75 billion of private activity bonds thanks to more forgiving requirements from the federal government.
Three months ago, when the U.S. Department of Transportation extended All Aboard Florida's deadline to sell the tax-exempt bonds, it also quietly agreed to let the passenger railroad sell the bonds in multiple offerings, instead of all at once, according to December correspondence between the DOT and All Aboard Florida.
The Department of Transportation — which is responsible for allocating transportation-related private activity bonds — originally told All Aboard Florida it would have one shot to sell the large bond offering and that any bonds not sold would transferred to other transportation projects throughout the country.
The new format could help the $3.1 billion Miami-to-Orlando railroad target various segments of the high-risk bond market and court a wider array of investors, according to local experts.
However, should All Aboard Florida continue to struggle to find investors, the Department of Transportation could grant another extension. In the December letters, it indicated a willingness to grant a third extension on the bonds, which originally were to have been sold by July 1, 2015.
Financing snags likely have contributed to further delaying the project.
Brightline service between Miami and West Palm Beach — previously slated for early 2017 — has been pushed back to mid-2017, according to the company.
"The extension of time for the approval of bond issuance affords us the flexibility to select the most appropriate structure and timing for the financing of our project," a spokeswoman said Friday. "Importantly, construction is well underway, and we will deliver Brightline service mid-2017."
The company previously has said full service — from Miami, through the Treasure Coast and on to Orlando International Airport — would begin in late 2017, but on Friday did not indicate if the final phase also has been pushed back.
When All Aboard received approval to sell its tax-exempt bonds, nearly seven months ago, the company said it was confident it could do so within days or weeks. But months went by without any sales, and in November the company postponed a planned public auction.
Company President Michael Reininger, in the December letter, blamed a tough bond market for the delays.
Local experts agree All Aboard Florida is facing a difficult market — and one that actually may be getting worse.
"The junk-bond market isn't looking so good" and neither are broader economic indicators, said Robert Rhee, University of Florida Levin College of Law professor and former investment banker. "There's some discussion of a recession, the equity markets aren't doing so well and there are disturbances in China. The economic indicators are very choppy."
Still, the ability to sell the bonds in waves may work in the company's favor, according to Jay Kesten, Florida State University College of Law assistant professor.
"Their underwriters might be telling them there isn't the appetite for $1.75 billion at 8 percent, but we could do $400 million at 6 percent and $300 million at 7 percent or something like that," Kesten said.
Smaller offerings could be particularly beneficial at public auction.
"They won't hold a public auction unless they're pretty sure they're going to sell all the bonds," Kesten said.
Deanne Butchey, senior lecturer in the Department of Finance at Florida International University, said she, too, thinks multiple offerings could make the bonds more attractive, and marketable, to investors.
"With a more-limited supply of bonds to sell, the perceived risk to investors may be diminished, and there can be an intense marketing focus to suitable, potential investors," Butchey said.
Bond-offering documents released in August noted that the project was high-risk, based on a number of factors, including that All Aboard Florida is unproven and could default. Multiple offerings could increase investor confidence, according to Sean Davis, University of North Florida finance professor.
Investors may prefer buying in (smaller batches) "to see if the issuer has been hitting milestones before investing hundreds of millions more," Davis said. "If there are delays or problems, debt costs increase. If not, risk is reduced and the debt can be issued at a lower yield."