Brightline nears Chapter 11 with $4.4 billion of muni debt; its junior bonds already trade near 33 cents

Brightline, the Fortress Investment Group-backed passenger railroad that runs 235 miles of track in Florida, may file for Chapter 11 bankruptcy as soon as Thursday morning, The Bond Buyer reported on Wednesday. Bloomberg first reported the plan on Tuesday, and the Wall Street Journal reported that the filing is planned in New Jersey. As of Wednesday afternoon no filing had been reported.

With $4.4 billion of municipal debt, Brightline is one of the largest borrowers in the high-yield muni market, and The Bond Buyer called it what would be the largest municipal-market bankruptcy in years. Under the plan as reported, the trains keep running and the muni bonds do not lose any face value. The restructuring is aimed at $1.19 billion of taxable corporate notes with an 11% coupon, held by a group of hedge funds.

Four layers of debt, four different outcomes

The headline "no haircut for muni bonds" is true on par value, but it hides how much the market has already marked some of these bonds down. Here is the stack as The Bond Buyer laid it out:

A bond at 33 cents is priced for a large loss, not for a clean recovery at par. Keeping the par value intact does not mean holders get paid on schedule: The Bond Buyer reported that payments on the subordinate muni debt would keep being delayed under the plan. Bondholders have agreed to push those payments back again and again, usually by a week or two. The latest extension, disclosed Tuesday, moved a due date by just two days, from Sept. 22 to Sept. 24.

Who actually holds the risk

This is a fund-investor story as much as a railroad story. The muni bondholder group named in the reports includes Nuveen, BlackRock, First Eagle, Assured Guaranty, Invesco and Nomura. Bloomberg reported that First Eagle and Nuveen, two of the largest high-yield muni mutual fund managers, are negotiating directly. That group has agreed to provide $490 million of exit financing, which would repay a $350 million loan Assured made in August that ranks ahead of all other debt.

So a retiree or business owner holding a high-yield municipal bond fund for tax-free income may own a slice of this without knowing it. The question for them is not whether the bonds are "cut," but how long the income on the junior bonds stays deferred and what the recovery looks like.

The wider market reaction so far is contained. In a Wednesday note cited by The Bond Buyer, JPMorgan called the expected exclusion of the operating unit from the filing "constructive news for municipal investors," and fund managers said they do not expect the problem to spread across high-yield munis.

What to watch

Thursday morning is the deadline on the delayed subordinate payment and the reported filing date. The filing, if it comes, will show the court, the proposed treatment of each class, and whether the operating company stays out as reported. For rate context behind a high-yield credit market that has gotten harder this month, see our story on the 10-year yield at 5.06%.

Sources: The Bond Buyer; Bloomberg, as cited by The Bond Buyer; The Wall Street Journal. This is market information, not investment advice.