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(Bloomberg) — Wealth and Wall Street have swept into South Florida the last several years, buoying the bonds of a startup private high-speed train that has long spooked investors.
Municipal securities issued for Brightline, the privately-run passenger rail company backed by Fortress Investment Group, have returned as much as about 20% this year as ridership climbed and the company prepares to open a long-awaited station in Orlando. That momentum — in combination with the relative cheapness of the securities — have caused them to far out pace a 5.5% gain for high-yield municipal bonds, according to Bloomberg’s index data.
Riders on the trains have surged nearly 80% through June compared to the first half of 2022, according to a company filing released July 20. Some of that growth is attributable to a more than two-fold increase in commuter and corporate passes as the region booms with business relocations and major cultural events. Brightline was filled with soccer fanatics heading to Lionel Messi’s debut last Friday.
The Brightline train currently runs between Miami, which has become a hot-spot for financial shops, and West Palm Beach. Citadel relocated its headquarters to Miami from Chicago and Elliott Investment Management switched from Manhattan to West Palm Beach.
“I think a lot of the retail investors actually live down in South Florida and they’ve witnessed and seen all the activity with Brightline and around the Brightline stations,” said Ryan Rosberg, a Nuveen LLC senior research analyst. “They want to be part of the action.”
While it’s still unclear whether enough Florida residents and tourists will give up their cars, bondholders have taken some comfort in Fortress’s support. After Brightline issued debt in 2022, Fortress contributed $443 million in equity, bringing its investment to $2.1 billion.
So far this year, about $34.5 million Brightline bonds in blocks of at most $100,000 have traded, compared with $3.5 million and $22.6 million respectively, during the same periods in 2022 and 2021, according to data compiled by Bloomberg. That indicates an interest in retail purchases.
Even though the bonds are generally bought by institutional buyers, they can be transfered to accredited investors with an annual income of at least $200,000 and a net-worth of over $1 million. Rosberg said such debt is typically bought by high-net-worth retail investors through “various wealth channels.”
Nuveen is the biggest municipal bond investor in the project, holding about $2.7 billion of the securities, or 73% of the project’s outstanding bond debt, according to data compiled by Bloomberg.
Perhaps even more important for performance was investors’ view that the debt was simply too cheap to pass up.
In January, Brightline’s most actively traded debt, unrated securities with a 7.375% coupon, traded at 88 cents on the dollar to yield 8.6%, close to the highest yield since the bonds were issued in 2019. On Wednesday, the bonds traded at 101.5 cents on the dollar to yield 7.1%.
“Starting at that level, it’s hard to find anything else that comes close to that type of yield unless you’re in some type of major default or distress,” said Chad Farrington, a portfolio manager at DWS Investment Management. “I don’t think fundamentals are the main driver. I think the main driver is just the fact it started out cheap.”
Orlando Extension
Brightline has yet to be profitable, losing $260 million last year. One-way tickets for the 3 hour and 30 minute trip from Miami to Orlando cost $79 for regular seats and $149 for premium, according to Brightline’s website. The trains are expected to reach maximum speeds of 125 miles-per-hour.
The company plans to open the 168-mile extension to Orlando International Airport as soon as Sept. 1, ideally capturing the flood of tourists vacationing to Walt Disney World Resort. In April, Brightline invited more than 300 guests to its new 37,500 square-foot station at the airport, where politicians and executives were joined by muni-bond dealers and institutional investors.
After opening the Orlando extension, Brightline plans to extend the line west to Tampa, with a projected completion in 2028.
It’s also negotiating commuter rail initiatives with Miami-Dade and Broward counties to lease its corridor for commuter service and act as a feeder to its intercity service. Miami-Dade has agreed to make $50 million in upfront payments to Brightline and annual access payments for 30 years starting at $12 million annually.
Given the dearth of high-yield muni issuance this year, the Brightline bonds could rally even further if high-yield muni fund inflows pick up, Farrington said.
Brightline said in June that it’s planning a series of potential refinancings for its outstanding bonds, which could include new issuances of debt or equity and a public rating.
–With assistance from Amanda Albright and Felipe Marques.
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