Brightline West, the Las Vegas-Los Angeles bullet train, hit the market Thursday with $2.5 billion of unrated private activity bonds that sported nearly double-digit yields in what's likely to be the largest high-yield municipal bond borrowing of the year.
The deal was structured with a single $2 billion CUSIP, a relatively rare structure in the municipal market that investors said would enhance its liquidity. More than $3.4 billion orders came in for the $2.5 billion deal, with 75 accounts participating, according to two buyside sources.
"To compare this deal with other opportunities in the high-yield market, you're getting more liquid trading bonds, an excellent yield and good sponsorship with a very good economic premise behind it," said Jim Lyman, senior vice president at Belle Haven Investments, which participated in the deal.
All the bonds featured 9.5% coupons, were priced at a discount and are callable at premium, noted a high-yield portfolio manager who asked to remain anonymous. "They made it too attractive to ignore," the manager said, calling the yields and structure "eye-popping."
"It gives you coupon, yield performance, a lien on an exciting project, liquidity, it's lowish on the duration front, and government support and support from the equity sponsor," the manager said. "Those are lot of bells and whistles."
The $2 billion California tranche was bumped four basis points between preliminary and final pricing, according to traders.
DesertXpress Enterprises LLC, which does business as Brightline West and is owned by Fortress Investment Group, aims to own and operate the nation's first privately-owned, all-electric high-speed train. The most recent timeline has it running by December 2028, a date that misses the original target of opening in time for the Los Angeles Olympics.
The $2.5 billion borrowing
The sponsor has a total of $4.5 billion of private activity bond allocation, including $2.5 billion that expires at the end of March and $2 billion that will expire at the end of December.
Morgan Stanley, the lead underwriter on all of Brightline West and Brightline Florida financings, was senior manager on a team with eight co-managers. The bank declined comment and Brightline West did not return a request for comment.
In remarkably good timing for the borrowing, the Trump administration singled out the project for praise Thursday as the administration announced it may
"The slow progress by [California High Speed Rail Authority] contrasts with the impressive work of Brightline West to build a high-speed rail system," the U.S. Department of Transportation said in the press release announcing the California probe.
Some investors had been concerned about uncertainties around the
The financing team talked with investors and updated bond documents, which note that the Trump administration has already released its first reimbursement of $14 million.
The bond documents mentions under its "risk factors" that the FRA grant "may not be available to the company and the receipt and use of such grant funds are subject to various conditions and uncertainties."
"Of the $3 billion grant, approximately $2.67 billion has been obligated in the 2022-2025 federal fiscal years and approximately $326 million has been appropriated by Congress under the Infrastructure Investment and Jobs Act as part of an 'advance appropriation' that becomes available for obligation in federal fiscal year 2026," the updated bond documents said.
Lyman said the firm was following the administration's signals closely.
"The California high speed rail train has been mentioned in very negative ways by Trump during this campaign and we were always concerned they would think about all the rail deals in the same way," Lyman said. "As we started to dig deeper, we felt there was clear differentiation between the projects," he said.
"One of the big concerns in the marketplace among all investors was the federal grants being rescinded and there were conversations about the management team about it and we went in depth about how those grants were already funded technically in prior-year Congressional funding agreements, so to rescind it is to break a contract," he added.
Prior to the deal pricing, Jeff Devine, a municipal research analyst at GW&K Investment Management, said the firm was unlikely to participate.
GW&K usually participates in "more traditional structures," and some of the deals that have those products aren't "appealing" to the firm, especially with where it is with its separately managed account business, Devine said.
GW&K took a "hard look" at the Brightline Florida passenger train financing deal from last year and ended up passing on it based on uncertainties around ridership projections and the underlying economics. He added that the backing of Fortress Investment Group was a positive.
Brightline West plans to begin construction early this year. After construction is complete, the company may seek investment-grade ratings for all the outstanding tax-exempt bonds, similar to last year's
"They want this deal to be the cheapest deal they ever bring to the market for this name," said the high-yield portfolio manager. "Each subsequent deal they'd like to bring at a lower yield and then eventually get a really good refinancing activity and credit rating at the right point in time."
Jessica Lerner contributed to this report.
