Reoirt states AAF bonds rated in junk category and AAF has cancelled sale for present.
http://www.bloomberg.com/news/articles/2015-11-12/junk-deals-derailed-as-high-yield-muni-funds-pull-in-less-cash
I thought this was one private passenger rail project that had a good chance. I guess we will have to wait to see if they can re-market the financing.
My personal take on this project is that I would like to see it succeed, that is be built AND operate profitably with a ROI of 10-15%, BUT would not invest my own money in it.
Somehow FEC made a deal with the Florida Development Finance Corporation under which the FDFC would sell tax free municipal bonds, which carry a lower interest rate than do corporate bonds, the proceeds of which would be, evidently, lent to FEC to finance the project with repayment from project revenue. The deal was a "flag of convenience" and arguably an abuse of the tax free aspect of municipal bond finance. The article says the market would not buy becuase the buyers, municipal bond funds have relatively little cash on hand and investor cash flows into the funds have been weak for many months. In addition, smart money says interest rates are likely to trend up soon, which implies that the offered interest rate was too low.
This failure does not kill the project, it just means that the FEC will have to sell the bonds in its own name. Buyers will not get the tax exemption they would on munis. The interest rate will be about 50% higher than on munis. More risk and more cost for FEC. The good news is that the market for corporate securities is much deeper than for munis.
Nice try but no cigar.
Mac McCulloch
Mac, thanks for the analysis.
I concur with Mac. My take is also that munis are not popular now, but once all the self-induced market Angst over raising interest rates is calmer, the flow of money into those funds will improve. That might allow AAR to proceed, albeit with a delay until then, maybe March 2016.
C&NW, CA&E, MILW, CGW and IC fan
As a last resort, you can always call the Chinese or other foreign entities. Since it is a German company building the trainsets, maybe Germany could pony up some cash.
PNWRMNM The deal was a "flag of convenience" and arguably an abuse of the tax free aspect of municipal bond finance
I thought Industrial Revenue Bonds were pretty much the same deal. Most states in the Midwest issue them to private business for business expansion. Although I thought there were Capital Limits to how many could be sold.
The bonds are tax exempt as well and sold at the Muni or State level depending.
I also have to think that the fact they were rated seven levels below investment grade also made them less attractive.
BTW on this item I caught mention of AAF earlier fundraising efforts. They call themselves Brightline now.....
"The experience of All Aboard Florida could be instructive. The company is in the process of cutting a number of land deals with various levels of government for stations and transit-oriented developments around them, and has won a commitment from the state to build its terminal at Orlando International Airport. The Texas project is expected to follow a similar approach to development, though company officials have already nixed the idea of developing stations at airports.
Just recently, All Aboard Florida took its biggest step yet to realizing its passenger project, one that Texas Central will eventually have to emulate: It sold $405 million in debt to private investors to finance the initial South Florida leg, from Miami to Fort Lauderdale.
All Aboard Florida offered investors a 12 percent annual return on the five-year bonds. The high-yield offering sold quickly, surprising observers who predicted investors would be scared off by the fact that All Aboard will have no cash flow until the railway is operating, which won’t be for at least another two years. But while the success of the sale could bode well for Texas Central, the projects could also be received very differently. In its coverage of the All Aboard bond sale, Reuters reported that private investors were attracted to the project in part because it involves repurposing and expanding an existing freight railway and doesn’t require as much higher-risk, ground-up construction as the Texas project. Another draw for investors, Reuters reported, was the possibility of government financing down the line, again something that the Texas project doesn’t offer."
So to me it looks like Miami to Ft. Lauderdale is already financed and AAF was trying to get a deep discount deal before interest rates rose on the Ft. Lauderdale to Orlando portion.
Miami to West Palm, as they said did not involve new track, and was primarily a real estate deal. West Palm to Orlando does require about 40 miles of new track at the Orlando end, and because the airport will build the only station, there is no real estate development. Investors only seem to be interested in the understood value of real estate development.
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