MICHAEL MAYO - SUN SENTINEL
Getting $1.75 billion in tax-exempt bonds approved by a state board on Wednesday looks to be the easy part for All Aboard Florida.
The seemingly harder part for the proposed Miami-to-Orlando express train: Getting investors to buy the risky unrated bonds (junk bonds, in financial parlance), and being able to make an estimated $105 million in annual debt payments to repay the bonds.
“Investing in the Series 2015 [All Aboard Florida] bonds involves a high degree of risk,” states the Limited Offering Memorandum drafted by Bank of America Merrill Lynch for the bond sale.
The document goes on to list 25 pages of risk factors that could lead to default or insolvency, including possible construction delays, cost overruns, regulatory/legal problems, faulty ridership/revenue projections and high debt load.
The Offering Memo is part of a 176-page informational packet submitted to the Florida Development Finance Corporation in advance of Wednesday’s 1 p.m. meeting in Orlando.
The FDFC is a public body authorized by the Legislature to issue bonds. A contingent of AAF opponents from the Treasure Coast will bus to the meeting to speak out against the deal, which would exempt investors from paying federal income tax on bond proceeds. A federal agency has authorized the tax-exempt status.
No state or county taxpayer money will be pledged to repay the bonds; it’s all supposed to come from All Aboard Florida revenue.
“The company currently has no revenues or cash flows and has never constructed or managed a passenger railroad,” the Offering Memo states. “There can be no guarantee that the company will achieve profitability and generate positive operating cash flow in the future.”
The FDFC isn’t exactly a disinterested party. Budget documents show it will reap $1.8 million in fees if it approves the AAF bonds. A lawyer for Martin County, which is suing to halt AAF, has gotten emails through discovery showing a cozy relationship between AAF officials and some FDFC board members, even before those board members were appointed by Gov. Scott or confirmed by the state Senate.
The Miami-to-West Palm Beach leg of the rail service is supposed to start running in the second quarter of 2017, according to documents submitted to the FDFC. The West Palm-to-Orlando leg might open by the end of 2017, but the documents state the company still hasn’t finalized approval or construction contracts for a 35-mile leg from Cocoa to the Orlando airport.
An AAF consultant has projected the rail line will have 753,700 passengers and $32 million in fare revenue in 2017, swelling to 5.3 million passengers and $343.9 million in fare revenue by 2020.
AAF officials say the figures are realistic. To me, they sound wildly optimistic to borderline delusional.
“The company is relying on third-party consultants for ridership and revenue estimates,” the Offering Memo states. “The company and underwriter can’t vouch for the accuracy or reliability of research data,” noting it was not subject to independent verification.
Because the bonds will be unrated, that is issued without an investment grade rating, the FDFC has proposed limiting the offering to larger institutional investors and setting a minimum investment amount of $100,000.
The $1.8 million fee explains why the FDFC would enable a high-risk bond offering.
But the bigger question is this: If All Aboard Florida is such a good idea and has a reasonable chance of success, why is it falling on junk bond investors to back them, instead of AAF’s deep-pocketed corporate parent, Fortress Investment Group?