KBRA Assigns BBB Ratings to Florida Development Finance Corporation’s $2.22 Billion Florida Development Finance Corporation Revenue Bonds (Brightline Florida Passenger Rail Project) Brightline Trains Florida LLC Issue, Series 2024 (Tax-Exempt)

KBRA assigns its BBB ratings to Florida Development Finance Corporation’s (FDFC) aggregate $2.22 billion Florida Development Finance Corporation Revenue Bonds (Brightline Florida Passenger Rail Project) Brightline Trains Florida LLC Issue, Series 2024 (Tax-Exempt). A portion of the PABs ($1.13 billion) benefit from a financial guaranty policy issued by Assured Guaranty Municipal Corp, which has a KBRA rating of AA+. The Outlook is Stable.

FDFC issued the PABs as conduit issuer and lent the proceeds to Brightline Trains Florida LLC (Brightline Florida) as borrower. Brightline Florida developed the 235-mile intercity high-speed passenger rail service connecting Southeast and Central Florida in two phases. Phase I, comprising a 67-mile segment from Miami to West Palm Beach, was completed in late 2017, with passenger service offered between Fort Lauderdale and West Palm Beach in January 2018, extending to Miami shortly after in May 2018. Phase II extended the system 168 miles from West Palm Beach to Orlando. This phase includes an east-west segment with approximately 39 miles of new rail from Orlando International Airport to Cocoa, as well as improvements to 129 miles in the existing Florida East Coast Railway (FECR) north-south segment from Cocoa to West Palm Beach. Phase II was recently completed, with the revenue commencement date on September 22, 2023. The high-speed rail service now spans Miami to Orlando, with main stations in Fort Lauderdale and West Palm Beach, as well as inline stations in Aventura and Boca Raton, both of which started revenue service in December 2022.

Key Credit Considerations

(+) Competitive Advantage

Brightline Florida connects Central Florida with the largest population centers in Southern Florida through a high-speed passenger rail system. Intermediate stops between the Miami-to-Orlando corridor include Fort Lauderdale, West Palm Beach, Aventura, and Boca Raton. Brightline Florida’s main competitive advantage over current modes of travel will be reduced travel time, including up to two hours saved between cities for certain station segments.

(+/-) Debt Refinancing

Brightline Florida issued $2.22 billion in tax-exempt Florida Development Finance Corporation revenue bonds (Brightline Florida Passenger Rail Project) Brightline Trains Florida LLC Issue, Series 2024 (Tax-Exempt) issued through the FDFC (the private activity bonds, or PABs) to partially refinance its outstanding debt, which included $2.7 billion of senior debt and $950 million of taxable senior debt. Additionally, $2.25 billion of subordinated debt were issued through separate entities, Brightline East LLC and AAF Operations Holdings LLC (AAFOH). Subject to customary carveouts, Brightline Florida will be permitted to incur additional senior debt subject to rating affirmations by the credit rating agencies involved in the transaction. In addition, Brightline Florida will be permitted to incur subordinated debt.

(+) Strong Ridership Growth in South Segment

Brightline Florida showed strong monthly growth rates between January 2018 and February 2020, reaching 74.9% in 2019. Due to COVID, service was interrupted for most of 2020 and 2021 until it restarted in November 2021. Ridership has since recovered rapidly, reaching 1.2 million passengers in 2022, or 21.5% higher from 2019 levels. In 2023, passengers in the south segment totaled 1.7 million, a 42% increase over 2022. KBRA expects ramp-up rates to remain at similar levels through 2025, and to stabilize in 2026 as the south segment reaches a more mature phase in ridership growth.

(+) Long-Distance Ridership Forecast

KBRA expects long-distance ridership in 2024 of around 760,000 passengers, compared to the sponsor’s forecast of over 2.5 million. For future years, KBRA’s rating case uses conservative assumptions in terms of ramp-up rates on long-distance trips versus the sponsor’s forecast, with long-term ridership forecasts 20% lower than the sponsor’s base case. The transaction shows strong resiliency across the KBRA rating case and different sensitivity scenarios.

Rating Sensitivities

Higher-than-expected ridership or lower operating costs resulting in sustainably higher cash flow available for debt service could lead to a rating upgrade.

Lower-than-expected ridership and/or revenues, a more prolonged ramp-up period, or higher operating costs than forecast in KBRA’s rating case could also lead to a rating downgrade.

ESG Considerations

Environmental Factors

Brightline Florida’s passenger rail service is estimated to represent a 75% reduction of CO2 emissions per passenger kilometer compared to car transportation. Therefore, the transaction could potentially benefit from future regulation to address carbon limits and promote public transportation. The company received the green bond designation in 2019.

Social Factors

Traveler preference toward cleaner and more efficient ways of travel could benefit Brightline Florida’s ridership, especially if such preference changes are permanent. However, given the high exposure of the passenger rail industry to economic cycles, ridership could be impacted by economic downturns that result in rising unemployment and a reduction in disposable income.

Governance Factors

Brightline Florida’s management team comprises professionals with a wealth of experience in the transportation and hospitality industries. Further, the company’s construction management and operating teams come from diverse backgrounds with experience in some of the largest rail systems in the country, in addition to benefiting from Siemens engineers on site 24/7.

Rating Rationale

Under KBRA’s rating case we expect the project to have average debt service coverage ratios (DSCR) of 3.54x through the term of the debt, which along with an Average KPRS are sufficient to support a BBB rating on the PABs. The rating is limited to BBB due to the limited operational history, especially for the long-distance service, which started on September 22, 2023. Despite KBRA’s conservative scenario, should ramp-up rates be lower than expected under the KBRA rating case, the project’s cash flow profile could be severely impacted, limiting the project’s resiliency in downside scenarios.

Outlook

The Stable Outlook reflects KBRA’s conservative ridership scenario over the next 18 months. A rating upgrade is unlikely during the ramp-up period of the segment between West Palm Beach and Orlando, which is expected to go through 2027 under the KBRA rating case. Lower-than-expected ridership and/or revenues, or higher-than-expected operating expenses over the next 12 months could lead to a downgrade in the rating.

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Methodologies