(Bloomberg) -- Brightline, the first new US private passenger railroad in more than a century, is betting it can lure more Floridians out of their cars — but first, it is refinancing roughly $4 billion in debt.

The Fortress Investment Group-backed rail is reshuffling its debt in advance of a July 1 interest payment that should provide breathing room to ramp up operations after the opening of its long-haul Orlando line fell behind schedule and ridership came up short of the firm’s own projections.

Success for Brightline hinges on convincing travelers to take the train all 235 miles (378 kilometers) to Orlando as the rail seeks to replicate Amtrak’s popular Acela service in the Northeast, without government subsidies.

John Emmons is already a convert to Brightline for shorter hauls. 

The 42-year-old software salesman moved to Florida for the sunny weather and lower taxes, but traffic remained an ordeal. So, when the New Jersey transplant needs to get from his home in Miami to Fort Lauderdale, he takes the private rail that offers all the luxuries of business-class travel.

“Living in the Northeast most of my life, I thought there was a better chance of seeing a unicorn than having a pleasant experience on mass transportation,” Emmons said. “With Brightline my biggest concern is usually what beverage or food item I want from the trolley as it comes by.”  

Fortress has plowed roughly $2.2 billion into Brightline. Next week, investors will have the opportunity to take part in a wager on a rail renaissance when Brightline refinances about $4 billion in tax-exempt and taxable loans. 

The recapitalization will also be a litmus test of investor interest ahead of Brightline’s next move — a $12 billion high-speed rail line connecting Southern California and Las Vegas.

On Brightline West, trains will travel as fast as 200 miles per hour. The project received a $3 billion grant from President Biden’s infrastructure law in December, but it will have to sell billions more in bonds to finance the project. 

Boom Times

Brightline’s Florida experiment is playing out against the backdrop of an influx of wealth into the Sunshine State. Goldman Sachs Group Inc., Citadel and Blackstone Inc. have all opened offices in the southeastern region while Lockheed Martin Corp., Siemens AG and video gaming company Electronic Arts Inc. have major presences in Orlando.

The population of Florida grew 14.6% between 2010 and 2020, surpassing New York as the third-most populous state while Orlando and Miami are among the fastest-growing US cities.

That explosive growth means the market for long-distance trips between South and Central Florida should grow to top 38 million in 2026. That’s according to Brightline estimates, which put 2019 rides at about 35 million, with some 99% traveled by car. The railroad projects it can capture about 11% of those trips. 

But so far train ridership has lagged expectations. In the first quarter, Brightline’s monthly ridership averaged 241,000, equivalent to 2.9 million riders on an annualized basis. That falls short of the firm’s conservative scenario projections of 4 million riders in 2024, generating $338 million in revenue.

Ben Porritt, a Brightline spokesman, declined to comment.

Passenger rail would seem to be an ideal alternative to avoiding the stress of a traffic-clogged drive or the hassles of air travel. But  — unlike major cities in the Northeast, which have extensive public transportation networks — a traveler around Orlando still needs a car. 

“From Boston to New York, you can be completely reliant on transit and have a good trip,” said Naveen Eluru, a professor in the civil engineering department at the University of Central Florida. In Orlando, “if I want to visit multiple attractions, I might end up renting a car — which, in that case, is Brightline really competitive?”

Brightline sees it differently. 

“We anticipate a high level of demand for our intercity passenger rail service given the large number of travelers within the Miami-Orlando corridor and the current lack of convenient, reliable, uncongested and cost-effective travel alternative,” the firm’s bond offering documents said.

Daily bookings for long-distance service have increased to 4,600 in March from 2,800 in October while repeat booking have grown 15% month-over-month, according to the documents.

Still, ridership on its Miami-to-Palm Beach line declined compared with last year because it had to restrict capacity to meet demand for travel to Orlando. To mitigate the issue, it’s ordered 20 new coaches, with half of them to be delivered in mid-2024 and the remainder later in the year or in 2025. With the additional coaches, Brightline estimated March ridership would have been more than 310,000.

By 2026, the railroad forecasts 8 million passengers riding across Florida, with average fares growing to $85 from $58 today. If ridership falls short, Brightline estimates it can still break even and pay its senior-debt in 2026 carrying just 3.2 million passengers at an average fare of $85 per person.

Making Tracks

Brightline plans to sell $2 billion of municipal bonds with the lowest investment grade rating from S&P Global Ratings and Fitch Ratings as well as about $1.25 billion of subordinate taxable debt. Bloomberg reported earlier this month that Morgan Stanley, the underwriter, had been sounding out investor appetite for the taxable junk-bond portion at a yield of 10% to 11%. Another roughly $1.3 billion could come from unrated municipal debt and equity.

With the current long-distance fare averaging about $80, Brightline has room to raise rates, according to Raymond Wu, a senior fixed income analyst at Principal Asset Management. 

Investors looking for exposure to a privately run railroad should jump at the senior bonds as the company’s targets needed to pay down the securities appears achievable — even if the number of travelers it can convert to taking the train is unclear — he said. The train doesn’t offer significant time savings compared with driving when roads aren’t congested, he added.

“Their target audience is very narrow,” Wu said. “They’re catering to business and leisure customers that aren’t traveling in a group.”

The current refinancing will be used to pay off Brightline’s around $4 billion of unrated senior tax-exempt bonds and taxable debt as well as put aside about $550 million in reserves and funded interest. Those reserves should cushion the firm against potential ridership and revenue declines, according to S&P. Some proceeds of the deal will be used to pay interest on the senior municipal bonds through July 1, 2025.  

The investment-grade ratings on the senior municipal bonds and bond insurance on $1 billion of the securities should broaden the market for the municipal debt and lower Brightline’s borrowing costs, according to Vikram Rai, head of municipal markets strategy at Wells Fargo & Co. Brightline’s current senior muni-bond debt is unrated and almost 80% is held by Nuveen LLC.  

A scarcity of higher-yielding munis is also expected to drive strong demand, Rai said.

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