NEW YORK, June 20 (IFR) - Investment management firm
Fortress stunned the market this week by selling a deeply
subordinated payment-in-kind (PIK) toggle note to finance a new
Florida passenger railway service.
Investors took on considerable risk - on top of the already
risky PIK structure - as there is no cashflow until the project,
already facing some political push-back, is up and running.
The All Aboard Florida project plans to expand an existing
freight railway on Florida's east coast to begin carrying
passengers for the first time since 1968.
"We didn't spend a lot of time looking at it just because we
saw it as an equity play," said Michael Sohr, a high-yield
portfolio manager at AllianceBernstein.
"But we were watching to see whether it would get done."
And get done it did, as lead bookrunners JP Morgan and
Morgan Stanley priced the deal Tuesday in line with price talk
at par with a 12% PIK coupon and 12.75% if PIK.
"Where can you get 12% yield?" one banker close to the deal
"You can move down the credit spectrum, buy longer
maturities, or move into something a bit more off-the-run in a
company that you like, which this deal is a good example of."
The trade has performed well in secondary - it was seen bid
at 101.75 late on Thursday - which underscores the willingness
of investors to keep chasing after yield.
It was a boon for Fortress, which now will have to stump up
less cash to finance what would be the only privately owned and
operated passenger rail system in the US.
The line would connect Miami to Orlando via intermediate
stations in Fort Lauderdale and West Palm Beach.
While some county commissions along the route are already
making noises of opposition, Fortress is determined to win them
over - and the success of the PIK trade is seen as a vote of
confidence in the investment giant.
"This may be a project finance deal, but this passenger line
is attached to a marquee name, the Florida East Coast (FEC)
railroad, which is a one-of-kind unique asset," said the banker.
"If you are moving freight in and out of Florida, it's the
only place you can go. If anything were to go wrong with the
project, people believe Fortress will do whatever it takes to
make it work, because it is so invested in the railroad."
The fewer than 50 accounts that took part also had their eye
on some 21 acres of expensive real estate owned by Fortress in
downtown Miami, said another banker with knowledge of the deal.
To reassure investors, the deal was upsized to US$405m from
US$390m, with the extra proceeds put in an interest reserve
account to pay half of the cash coupon until the project is
The deal was also larded with investor-friendly covenants -
including a lien on the land, the rights to the passenger track,
the ability to run the business if the project goes wrong and an
offer to purchase at par if the project is abandoned before an
"It is a bit of an equity story," said another high-yield
investor who did buy the deal.
"On the other hand, unlike large infrastructure related
projects, most of the rail link is already there which reduces
the build risk."
The project will utilize existing infrastructure on the FEC
freight route, adding in switches and platforms, with the
eventual aim of extending to Disney World in Orlando.
"There is a belief that once it is up and running the
passengers will come, partly because the roads are so congested
around that area," said the investor.
Another senior banker with knowledge of the deal said
investors were also attracted by the possibility of government
financing later on if the Orlando extension goes ahead.
"From a government perspective, Fortress is using private
capital to get this passenger line started," said the banker.
"If the government does offer a loan, Fortress absolutely
will pay off the PIK. The government will want to have the first
lien on the equity, not sit behind the PIK bondholders."
The terms allow Fortress to buy back some or all of the bond
at 112 prior to January 1 2017 with the proceeds of a government
(Reporting by Natalie Harrison and Shankar Ramakrishnan;
Editing by Marc Carnegie)