Municipal Market Reacts to Brightline Noteholder NDA News; Questions Arise Regarding Form, Consequences of Potential Restructuring

News that Brightline Florida noteholders have signed nondisclosure agreements ahead of a potential debt restructuring did not come as a surprise to the municipal market, but the move raises questions about what form a restructuring might take and what its consequences might be, market participants told Octus.

“At least for a couple months, most of the market has assumed that some sort of restructuring is going to be needed, especially with the rating downgrades, which unfortunately have been more reactive than proactive,” said an analyst, who pointed to recent trading of the AAF Operations Holdings LLC Series 2024A bonds, which has reached distressed levels in the 30s.

Several sources said they do not believe the move is related to Brightline West’s efforts to raise $400 million of equity proceeds or capital contributions by March 31, a requirement of Brightline West’s late 2025 bond exchange.

The main question regarding the Brightline Florida noteholder activity lies in whether the potential “out-of-court restructuring” would be a holistic solution to fix the balance sheet, or look more like a liability management exercise, or LME, to provide incremental capital to Brightline Florida, sources said. Existing liquidity has been spent down much faster than anticipated, and ramp-up reserves are projected to be exhausted by year-end, a source noted.

In either case, a restructuring would be complicated by the fact that many bondholders have debt at different levels within Brightline Florida’s corporate structure, explained one source, who added that certain structurally senior Brightline Trains Florida LLC, or OpCo, holders also own structurally subordinated debt of other Brightline Florida entities. The corporate noteholders at one time or another had gotten restricted and “tried to prime their position” because of the senior bonds ahead of them in the waterfall, and “anyone who’s not the OpCo senior lien level would want to keep [Brightline] out of bankruptcy,” said the source.

Bankruptcy could also raise unique or seldom-tested issues, even for holders at the OpCo level, because the Bankruptcy Code includes special provisions that modify the chapter 11 framework for debtors that are railroads, defined as “common carrier[s] by railroad engaged in the transportation of individuals or property or owner[s] of trackage facilities leased by such a common carrier.”

These provisions include section 1163, which requires the appointment of a trustee; section 1165, which requires the court to “consider the public interest in addition to the interests of the debtor, creditors, and equity security holders”; and section 1171, which elevates personal injury and wrongful death claims to administrative expense status. The railroad provisions also include special protections for parties with interests in rolling stock.

As a result, if the railroad-related provisions apply, a bankruptcy might look different from a typical chapter 11 and deviate from stakeholder expectations.

For bondholders, clarity regarding the ultimate form of any prospective restructuring may be needed soon, as April 15 is the deadline for Brightline Florida Holdings LLC to make the deferred Feb. 15 interest payment on its $985 million of Series 2025B bonds, as reported.