Brightline Florida bonds drop despite no-haircut restructuring

Recent steep drops in Brightline Florida bond prices suggest the market remains skeptical the municipal bonds will avoid a haircut under the company’s recent Chapter 11 restructuring.

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The trading has also shifted holders of the Brightline complex as Nuveen LLC trimmed its position and hedge funds stepped into the market.

Brightline Florida filed for Chapter 11 on Sept. 24 with a prepackaged Restructuring Support Agreement. With $4.4 billion of muni debt, Brightline is one of the largest credits in the high-yield market. Its bonds are relatively concentrated in the hands of a few owners, including Assured Guaranty, which wraps $1.13 billion of the senior debt.

The RSA, supported by the majority of lenders, calls for the municipal bonds — $2.2 billion of senior Opco debt; $1.2 billion of junior Holdco unrated debt; and $985 million of so-called commuter bonds — to avoid principal haircuts while deferring interest payments for a few years.

Despite the RSA’s proposal to leave the municipal debt whole, the senior uninsured bonds and junior unrated so-called AAFO bonds have dropped steeply in the last week.

On Monday, more than $15.4 million of junior unrated bonds due in 2059 with a 12% coupon traded for 5.37 cents. On Tuesday, about $5 million of bonds had traded up, to 8 cents. The bonds, which are secured by a proposed rail extension to Tampa, traded around 36.75 in January.

“Judging by the valuation that’s taking place in the secondary market, it does not seem that market expectations think at least the junior lien will be made whole,” said Miguel Laranjeiro, investment director for municipal debt at Aberdeen Investments.

The 5-cent trading level shows “people finally gave up,” said Jeff Timlin, managing partner and lead portfolio manager for municipal bond strategies at Sage Advisory Services.

Senior Assured-wrapped Opco bonds have held stable, with round lots trading at 95.6 on Oct. 2, signaling the market has confidence in the insurance, said Laranjeiro, whose firm holds some insured senior paper.

On Sept. 28, $139 million of uninsured senior Opco bonds dropped to 45.5. That’s down from 64 on April 8. The trade came as Nuveen unloaded all of its uninsured senior position, which was bought by hedge funds, according to Bloomberg.

Nuveen declined to comment on trading prices, but a spokesperson said the firm has reduced its exposure to Brightline by more than 75% since April 2023.

“We continue to have conviction in the development of the commuter rail connecting Miami-Dade, Broward, and Palm Beach counties, as this essential infrastructure will benefit Southeast Florida residents. We look forward to partnering with the counties, the state and project stakeholders to make the commuter rail line a reality,” the spokesperson said.

The commuter bonds last traded in January at 63. Totaling $985 million, the debt is secured by commuter rail access rights and equity interests in the Miami-Dade, Broward, and Palm Beach commuter entities.

First Eagle Investments, among Brightline’s largest holders, also remains convinced of the value of its position in the junior bonds secured by the Tampa extension.

“As the RSA indicates, the full par value of these bonds is being preserved, and the bonds are not subject to the Chapter 11 proceedings,” said John Miller, First Eagle’s head and CIO of municipal credit.

“We believe the development rights to extend the rail system along the I-4 corridor to Tampa, including a planned Disney stop located just south of Disney Springs in the median of I-4, remain valuable and that, given the expansion’s long-term importance to the overall franchise, there is a high likelihood, in our view, that it could proceed in the near future,” Miller said. “The existing $850 million release price for this collateral is multiples above recent trading levels, which imply a value of approximately $50 million, significantly below the release price.”

The hedge funds buying up the Brightline debt brings a fresh source of capital to the muni market, said Laranjeiro.

“That’s capital that was not in the muni market at all that’s coming in for the opportunity,” he said. “So you see some shift in risk taking from traditional high-yield muni shops to now some hedge funds that are players that weren’t part of the capital before.”

And Nuveen’s decision to sell its position frees up one of the high-yield market’s largest players to invest elsewhere, Laranjeiro said.

Nuveen “having the ability to exit this position and reinvest those monies into the high-yield market, that should be a boon for the rest of the high-yield market,” he said.

Meanwhile the steady march of downgrades on the rated Brightline debt continues.

Fitch Ratings on Oct. 1 downgraded the $2.2 billion of senior Opco bonds to C from CC. The downgrade reflects Opco’s entry into the RSA with Assured and other creditors, “which meets Fitch’s criteria for a distressed debt exchange,” analysts said.

Referring to the RSA’s proposal to defer three interest payments on the Opco debt, Fitch said that lender consent of the proposal would also be considered a distressed debt exchange and spark a further downgrade.

“The company faces sizable upcoming debt service requirements, including maturities, interest payments and mandatory tender obligations. In addition, both ridership and average fares have materially underperformed initial expectations, constraining the pace of operating cash flow improvement,” Fitch said.

Jessica Lerner contributed to this report