DARRELL PRESTON - BLOOMBERG
Fortress Investment Group sold Florida officials on its plan to build the first new privately run U.S. passenger railroad in more than a century, saying it will get 3 million cars off the road, create 10,000 jobs and provide a $6 billion jolt to the economy.
The New York private-equity and hedge-fund company now has to persuade another crucial audience: Bond investors who question whether Sunshine State travelers will leave their cars behind to ride on the 235-mile (378 kilometer) route from Orlando to Miami.
Since the state in August approved the sale of $1.75 billion of tax-exempt debt to finance the project, underwriters led by Bank of America Merrill Lynch have been trying to line up buyers for what would be the biggest Florida bond offering in more than two years. No final sale date has been set.
"We looked at it, but we are not going to be participating," said Lyle Fitterer, managing director in Menomonee Falls, Wisconsin, for Wells Capital Management, which holds $38 billion of municipal securities. "It came down to a credit decision."
The $3 billion project is part of a nationwide effort to revive railroads even as Amtrak, the federally subsidized passenger service, continues to lose money with ridership at a record high. Privately funded railroads have been proposed in Texas and the Washington area, while California may also draw on investors to help finance a high-speed service that's planned to eventually stretch from San Francisco to San Diego.
All Aboard Florida, the Fortress-owned company that's overseeing the project, declined to comment, said Melissa Shuffield, a spokeswoman. Gordon Runté, a spokesman for Fortress, declined to comment, as did Bill Halldin, a spokesman for Bank of America.
Florida officials will allow All Aboard to raise money through the state-run Florida Development Finance Corp., which can sell bonds at lower rates than businesses because investors don't have to pay federal-income taxes on the interest. All Aboard would be responsible for repaying the debt, which would leave buyers on the hook if the railroad struggles financially.
All Aboard last year sold five-year bonds in the corporate- debt market to raise funds. On Oct. 1, the securities traded for a yield of 13 percent.
At a meeting of the Finance Corp. on Aug. 5, when the new bond sale was approved, Bank of America managing director Jim Calpin said the bank planned to move quickly with a marketing effort to sell the 30-year bonds to select investors, including managers of high-yield municipal bond funds. He said investors would expect to be paid high interest rates, and the bank planned to reach out to prospective buyers around the country.
Among them was Jim Colby, who manages about $1.6 billion of high-yield municipals at Van Eck Global in New York. He said the deal didn't draw his interest.
"It was not priced to demand," Colby said. "That is about all I will say."
With no new passenger railroads in recent history, investors have little basis for comparison. Scheduled to open in 2017, the company expects that by 2020 it will carry about 5.4 million riders annually, some 5 percent of those who currently travel along its route. That would generate revenue of almost $300 million, All Aboard President Michael Reininger said at the Aug. 5 meeting. The company is holding down the development cost by using rail lines owned by its parent, Florida East Coast Industries Inc., and it also expects to make profits by developing nearby real estate.
There's a precedent for a profitable passenger railroad in America: Amtrak's northeast corridor, which travels along the densely populated route that runs from Washington to Boston, expects to earn $367 million in the 2016 fiscal year, according to the budget plan released this year. It's the long-distance lines that lose money.
It's unclear whether that northeastern success can be brought to Florida and if tourists, such as cruise-ship passengers, will use it as envisioned, said Daniel Solender, who oversees $17 billion as head of state and local debt at Lord Abbett & Co. in Jersey City, New Jersey. He said he hasn't decided whether to invest, though bankers said the company may raise more money from equity investors to alleviate some bondholder concerns.
"We've had toll roads and airports, but when was the last time you saw a new passenger rail line?" he said. "A passenger rail project is a whole different animal for this market."