Bonds for Florida High-Speed Rail Pop in Market ‘Starved’ for High-Yield Munis

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(Bloomberg) — Municipal bonds issued last week for Florida’s private rail operator, Brightline, climbed in the secondary market as investors clamored for new high-yield securities.

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Prices on large block trades for the BBB- rated securities issued with a 5.5% coupon rose as high as 105.4 cents on the dollar Tuesday, up from 102.3 cents when they were priced last week. Eager investors drove risk premiums, or the spread over top-rated debt, on the bonds tighter to about 75 basis points from 120 basis points.

Brightline’s Florida route where trains can reach speeds as fast as 125 miles per hour, is the first new US private passenger railroad in the US in more than a century. The railroad issued about $3.2 billion of municipal bonds as part of a debt restructuring and recapitalization last week. With backing from Fortress Investment Group, Brightline is also building a new, faster train line connecting Las Vegas to Southern California.

“Strong investor demand for the Brightline deal highlights just how starved the high-yield market is for big liquid names,” said Dora Lee, director of research at Belle Haven Investments.

Municipal bond funds that buy riskier debt issued for hospitals, real estate developments and transportation projects, have attracted $5.3 billion as of April 26, according to data from LSEG Lipper Global Fund Flows. Meanwhile, Barclays data show tax-exempt muni high yield issuance so far this year is $5.5 billion.

Brightline’s debt issue included about $2.2 billion of bonds with the lowest investment grade ratings, BBB- from S&P Global Ratings and Fitch Ratings, while another $925 million was unrated. The unrated bonds carried a 12% yield while the investment-grade debt had a top yield of 5.2%.

Another $1.3 billion of taxable high-yield corporate bonds were issued with an 11% yield.

The deal was structured differently than Brightline’s prior debt raises creating some uncertainty about demand, according to Dan Solender, head of municipals at Lord, Abbett & Co.

“Muni high-yield funds have been getting inflows so some firms probably wanted to increase the sizes of their positions after they got their allotment on the deal,” Solender said.

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