Michael Mayo from Sun Sentinel:
Listening to all the rosy talk coming from All Aboard Florida officials and supporters, you’d think this Miami-to-Orlando rail system is a slam dunk.
Then you read the fine print and go, “Uh-oh.”
Getting a state board to approve $1.75 billion in tax-exempt bonds turned out to be the easy part for All Aboard Florida. Now comes the real challenge for the proposed rail service: Getting investors to buy the unrated bonds – junk bonds, in financial parlance – and making enough money to repay bond holders an estimated $105 million a year.
The bonds carry “a high degree of risk,” according to underwriter Bank of America/Merrill Lynch. The memorandum drafted for the bond sale lists 25 pages of risk factors that could lead to default or insolvency, including possible construction delays, cost overruns, faulty ridership and revenue projections, regulatory problems, pending lawsuits and high debt load.
“The company currently has no revenues or cash flows and has never constructed or managed a passenger railroad,” the memo states. “There can be no guarantee that the company will achieve profitability and generate positive operating cash flow in the future.”
Passenger service along the eastern tracks in South Florida is a long-overdue option, and there surely will be positive economic development around the new downtown stations sprouting in Fort Lauderdale and West Palm Beach. All Aboard Florida also will bring Quiet Zones from Miami to West Palm Beach, silencing annoying horns on passenger and freight trains day and night.
But two big questions trail last week’s bond approval by the state-appointed board authorized to issue bonds for corporate activity, the Florida Development Finance Corporation (which stands to reap a $1.8 million fee from the bonds):
1. If this is such a good venture, how come it’s falling on junk bond investors to back All Aboard Florida and not the rail line’s deep-pocketed corporate parent, Fortress Investment Group?
2. What happens if All Aboard Florida defaults on the bonds and declares bankruptcy?
No state or county taxpayer money is pledged to repay the bonds; it’s all supposed to come from All Aboard Florida revenue.
Investors would be left holding the bag, but might All Aboard Florida seek a government/taxpayer bailout? A state bond official told the Associated Press it’s a possibility. State or county officials wouldn’t be obligated to help, but you never know what kind of deal might be pitched in order to keep passenger service (or a Tri-Rail expansion) on the eastern tracks. Especially if Broward or Palm Beach counties succeed in passing a transit tax in a future election.
Not that I would mind tax money going toward eastern rail transit. But it would be nice if we had an honest, upfront debate about it, instead of being forced to do it after the fact to fix a private firm’s boondoggle.
The Miami-to-West Palm Beach leg of All Aboard Florida is supposed to start in the second quarter of 2017. The West Palm-to-Orlando leg might be running by the end of 2017.
An All Aboard Florida consultant estimates 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. “The company and underwriter can’t vouch for the accuracy or reliability of research data,” the bond offering memo states.
The bonds are so risky, they’re deemed unsuitable for retail investors. Instead, they will be limited to institutional and high-income investors with a minimum $100,000 buy-in.
I wish All Aboard Florida nothing but the best, but I’m bracing for the worst. Hold onto your wallets.
mmayo@sunsentinel.com, 954-356-4508.
http://www.sun-sentinel.com/news/fl-mayocol-b080915-20150807-column.html