KBRA Assigns BB Preliminary Rating to Brightline East LLC’s $1.25 Billion Senior Secured Notes

KBRA assigns its BB preliminary rating to Brightline East LLC’s proposed issuance of $1.25 billion senior secured notes due January 1, 2030. The Outlook is Stable.

Brightline East is the indirect owner of Brightline Trains Florida LLC (Brightline Florida), the owner and operator of a 235-mile intercity high-speed passenger rail connecting Southeast and Central Florida.

Key Credit Considerations

(-) Structurally Subordinated Debt

The notes will be subordinated to all debt issued by Brightline Trains Florida LLC (Brightline Florida). Brightline Florida is currently seeking to refinance its existing debt, which includes $2.7 billion of senior debt and $1 billion of taxable senior debt. A portion of the debt will be refinanced through the issuance of approximately $2 billion tax-exempt private activity bonds (PAB) with the Florida Development Finance Corporation (FDFC) as the conduit issuer. Brightline Florida, along with its sponsor Brightline Florida Holdings, is still deciding whether to raise additional debt at either the Brightline Florida or Brightline East level, or to raise equity through a separate entity. Cash distributions from Brightline Florida to Brightline East will be subject to a backward- and forward-looking 12-month debt service coverage ratio (DSCR) of at least 1.3x.

(+) 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.

(+) 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

A rating upgrade is unlikely given the structural subordination of the notes to all debt issued at the Brightline Florida level. We could lower the rating if there were lower-than-expected ridership and/or revenues, a more prolonged ramp-up period, or higher operating costs than forecast in KBRA’s rating case that reduce Brightline Florida’s DSCRs below 1.3x.

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

KBRA’s rating case expects the notes to have average consolidated DSCRs of 1.41x without accounting for the balance available in the ramp-up reserve account (RURA), and average consolidated DSCRs of 1.61x when giving credit to cash available in the RURA. These coverages, along with an Average KPRS, are sufficient to support a BB rating on the notes. 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 its resiliency in downside scenarios.

Outlook

The Stable Outlook reflects KBRA’s conservative ridership scenario over the next 18 months, and KBRA’s expectation that cash flows are distributed to Brightline East in every payment date under the rating case. A rating upgrade is unlikely due to the structural subordination of the notes to any existing and future debt issued by Brightline Florida. A rating downgrade over the next 18 months is unlikely due to the strong liquidity provided by the prefunded interest reserve and the RURA in the first years of the financing. However, if these reserves are funded in amounts substantially lower than expected, we could lower the rating.

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Methodologies