Brightline, a privately owned passenger train service in Florida, recently entered the tax-exempt market with more than $3.1 billion of low-investment grade and unrated bonds. This move attracted a lot of attention from investors due to the high yields offered, some as high as 12%.
Investor Response
Despite the risky nature of the bonds, there was strong demand for all the paper, with more than two times oversubscription and over 50 accounts vying for the investment-grade piece. The bonds were marketed to qualified institutional buyers under Rule 144A, indicating the high level of risk associated with these investments.
Debt Details
The $2.2 billion investment-grade piece of the deal was backed by the Fortress Investment Group, while the unrated tax-exempt bonds totaling $925 million were issued by a subordinate borrower responsible for a planned extension to Tampa. This extension is considered speculative and adds an element of risk to the overall deal.
The bonds offered by Brightline featured BBB-minus ratings from S&P Global Ratings and Fitch Ratings, as well as BBB ratings from Kroll Bond Rating Agency. Spreads tightened by 10 basis points amid strong demand for the investment-grade piece, leading to an increase in the size of the deal to $2.219 billion. Insured bonds due in 2053 with a 5.25% coupon saw a decrease in yield, indicating investor confidence in the project.
Chad Farrington, co-head of municipal bond strategy at DWS, highlighted the risky nature of the unrated tax-exempt bonds, especially due to the speculative extension to Tampa. The bonds featured a mandatory tender date of July 2028 and are callable almost immediately, presenting additional risks for investors.
Despite the risks associated with the Brightline bonds, the company’s high-profile status in the market and the favorable technical conditions, including significant inflows into high-yield mutual funds, have contributed to the demand for these investments. The lack of high-yield supply, coupled with Brightline pulling more than $2 billion out of the high-yield market, has created favorable conditions for the company’s bond offering.
Brightline’s foray into the tax-exempt market with its low-investment grade and unrated bonds has attracted attention from investors looking to capitalize on the high yields offered. While the speculative nature of the extension to Tampa adds a layer of risk to the investment, the strong demand for the bonds and the company’s high-profile status in the market indicate potential opportunities for investors. It will be crucial for investors to carefully assess the risks associated with these bonds and consider their investment strategy before committing to this opportunity.