Brightline: running out of track

[MUSIC] Hello and welcome to DETWire. My name is Paul Graves and I'm the Managing Editor for DETWire Municipals. Today's episode is titled Bright Line, Running Out of Track. Joining me today is Steven J. Lubin, Professor at Seaton Hall University School of Law, and one of the country's leading experts on corporate restructurings. Steven is also the author of, "To Protect Their Interests, the invention and exploitation of corporate bankruptcy." A new book that traces the evolution of corporate reorganizations from 19th century railroad restructurings to the modern bankruptcy system. Steven, welcome to the podcast. Thanks for having me. So Steven, Bright Line, Florida is the privately owned passenger rail operator connecting Miami and Orlando. The company is part of a broader vision to expand passenger rail service in Florida, including a proposed extension from Orlando to Tampa. The company has amassed roughly $5.5 billion of debt through a complex mix of tax exempt project finance bonds, taxable corporate debt, and multiple borrowing entities. Bright Line has spent much of the summer negotiating a series of short term extensions where creditors covering roughly $2.2 billion of municipal debt. Bond prices have fallen to distress levels and market participants increasingly expect some form of a broader restructuring. What makes Bright Line particularly unusual is its mix of tax exempt financing, private ownership, multiple borrowing entities, and creditors groups with different rights and remedies. Steven, one of the themes in your new book is that railroad restructurings help shape modern corporate reorganization. Here we are in 2026 discussing a privately owned passenger railroad that appears to be moving towards some form of restructuring. Do you see any parallels between the railroad restructuring you write about and what we're seeing with Bright Line today? Well, yeah, there's an obvious parallel. And that is that Bright Line, like the railroads of the 19th century, has a bunch of assets in its operating company, at least, that can't really be used for anything else. That was one of the reasons why corporate restructuring, what was invented in the 19th century, was the very biggest companies in the United States for all railroads. And they had a bunch of assets that you couldn't really use for anything else, right? You got right away on a narrow strip of land that goes, you know, hundreds, sometimes thousands of miles. What else are you going to do with that, right? And you got a bunch of physical assets, local motives, and so forth that also really don't lend themselves to any other use as well, right? So in the 19th century, they developed railroad receiverships to try to restructure these assets. If we were to restructure Bright Line, at least the operating company of Bright Line, today it would be under chapter 11, but chapter 11 grows out of that history. So back in June, when we interviewed you for a story, you told us that there's nothing quite like Bright Line. And now after several of these extensions, do you still feel the same way? Yeah, I do, because in part, my comment was based on the idea that we have not had a private passenger railroad since, well, since Amtrak was invented. And the early 1970s, right? The really hasn't. Amtrak took over all the private passenger rail service in the United States, beginning in, I believe it's 1971 when they were created. And we haven't had a private rail carrier really since they did that. A private passenger rail carrier, of course, we have a lot of private freight companies, but they're also different than they were back in the time period I was writing about, because now they're huge giant corporations, right? And a lot of the freight companies that they've all consolidated into three or four really big companies, and we don't have the financial distress in that sector that we used to. In the, in the old days, right? The 70s kind of cleaned that all up. So every now and then we have the occasional railroad bankruptcy, but they're not, not so common. And we haven't had one involving passenger rail for a long time. So, so, Brightline is, is pretty unique in that respect. And again, they're unique because if they were to file chapter 11, they would invoke special provisions of the chapter 11 that aren't used all that often. So Brightline has now received these multiple short-term extensions, some lasting only a week or so. What does that tell you about the state of negotiations? Well, I guess it tells me that the negotiations are ongoing. And it's also, it's a tricky situation as you noted in your introduction. And the complex, there's a very complicated capital structure here. Some of the bondholders don't really have much in the way of collateral, right? They're bondholders at the operating company level. And there's so they have no reason to really push the company into bankruptcy. Because if that happens, there may not be much for them to get paid. So, I think we're all just waiting for a deal to happen. But the question is, is, you know, what is that deal going to look like? We don't have a real good sense of that now. But my general sense is that we probably have some pretty tough negotiations going on between some of the bondholders who have just claims against holding companies and those bondholders who are at the operating company level who, at least until the next coupon is to have a fair amount of power, it seems to me. So, you've highlighted the possibility of different creditor groups could follow different restructuring paths. Are we starting to see any evidence of this yet? Not yet, but when push comes to shove, especially, you know, I just mentioned one important timeline in this case seems to me. It will be when the next coupon is due in the operating company bonds, which is not until like January. But as we move closer to that, then we might just start to see some divergence between the various companies. But until that point, I suspect what is going on is especially the taxable bondholders might be trying to save their position by offering to put in a little money. And the question is, is how much money are they going to put in, right? The operating company bondholders probably want them to put in a whole lot of money because and the taxable bondholders who are at one level up from the operating company might be saying, oh, we don't really want to put in that much money, right? And so you have this sort of back and forth and clearly nothing has been resolved yet because we keep getting these extensions. So you have a sure guarantee bond and sure involved in this transaction that ensures, you know, a majority of the muay bonds out there that's become the central play in this bright line story. How important is their role in terms of determining what happens next? It strikes me as extremely important. I mentioned that the operating company bondholders to me have a lot of power. It seems like in this negotiation. Well, and the insurance company here is insured like half, as you say, about half of that, the operating company debt. It's a little less than half because there's that weird revolving credit facility, but that's kind of small relative to the bonds, right? So you have one player who's got like half of the operating company debt, and as I mentioned, that's probably the most important piece in this overall structure. So they're going to have a big say in what happens ultimately what the deal ultimately looks like. Now, again, they don't directly own the bonds, but they are they are of the effective going to be the effective owner of the bonds at some point. Certainly, once like I mentioned once we get down to coupons in January, it's not clear to me that the company has an ability to pay that coupon in January. So yeah, and thank you for correcting there. It's probably best to describe them as a majority holder, as opposed to most, but they're still in the pole position in terms of determining what happens going forward. And that leads me to my next question, because this is an unusually complex capital structure, where when I look at the organizational chart, I see operating companies that seem to be higher on the chart, but then when I look at their lean position, they seem to be lower. So because of the structure of this deal, How much is being driven by that, by the fact that it's just unusually complicated? Well, I suspect a lot is being driven by that, and as I mentioned earlier, too, I think there's also a bit of a game of chicken going on here, right? If the operating company were to go into chapter 11, that raises a lot of complications, but it also raises the potential that the operating company might just say, "Okay, we're just going to start equitizing right dead at the operating company level." Well, that's going to wipe out all the bondholders who are technically senior in the capital structure, but they are what we would refer to as structurally subordinated. They're structurally subordinated because they are just shareholders of a company below them, right? I mean, that's all they've got to claim on as shares in the company below them. There's no actual real assets in any of those holding companies that sort of go up the chain. So a lot of those bondholders don't have a real strong incentive to push this issue because if push comes to shove, they might get wiped out. So they would rather keep the option alive by keeping the company out of bankruptcy because they don't want to face the risk of being wiped out or zeroed out. The operating company on the other hand, again, I'm not sure the insurance company is really keen to become the shareholder of Brightline, right? So they also have some incentive to let this thing play out for as long as possible and see if maybe somebody else would like to put in some money and become the shareholder because, again, I don't think the bond insurance company would be totally thrilled to become the 50% shareholder of Brightline, which is where ultimately, if no deal is reached, that's ultimately where this might end up. So that leads me to a couple more questions for you. And the first one is for investors following this situation, what's the next development excuse me they should be watching for? And the reason I characterize it as development, because in my mind, I'm not sure just having if there is a restructuring agreement that happens in the near future, that that's necessarily a development that tells us anything other than, well, they made an agreement, but what to you, are you looking to see, to tell you to give you some sense of where this credit is going? Yeah, well, I guess it depends first off, which piece of the complex capital structure we're talking about. If we're talking about the operating company debt, which is probably the more likely stuff for retail to be involved in either directly or indirectly. The big issue there is, you know, are they going to put this thing into chapter 11? Now the risk, the complication of putting the railroad into chapter 11, which I kind of alluded to before, is the chapter 11 has special provisions for railroads. And key among them is that there has to be a trustee appointed. So that might give all these parties some incentive to stay out of chapter 11, because they don't want to introduce a trustee. So if there is a deal, one interesting thing will be, are they going to try to do it out of court? Are they going to try to do it outside of chapter 11 so they can avoid the trustee issue? Alternatively, they might try to do it in court if they think they need to do it that way, but maybe they'll try to get some sort of agreement on who's going to be the trustee. Now they don't really have an ability to appoint a trustee, that's the U.S. trustee's office, which is part of the Department of Justice would appoint the trustee. But they might take a suggestion, right, especially if everybody is on board with, hey, here's the guy or the woman we want to be trustee, that would be one possible. So in court out of court, is there an agreement on who's going to be the trustee if it is in court? Those are all important developments, it seems to me. So I'm not looking for a prediction on Brightline, but what I would like to get given your expertise is from your perspective in terms of, again, going back to the book that you've written on corporate bankruptcies, does this deal seem like it was structured in a way to position it for success or something else? Well, you know, again, it's another similarity with the railroads of the 19th century. The railroads of the 19th century were all built with a whole lot of optimism. The book starts by telling the story of the Texas and Pacific Railroad, which was supposed to be the Southern Transcontinental Railroad. It was going to go all the way basically from New Orleans to San Diego. Problem was, as this is in the 1880s, and nobody lived basically anywhere west of Fort Worth, right? And so you're building a railroad through the middle of nowhere. And they borrowed millions of dollars to build this railroad through Western Texas, which is essentially abandoned at this point in time, oil is not discovered till the 1920s, right? So there's no reason for anybody to live in West Texas by and large. There's something similar with Brightline. I mean, obviously Florida is actually a well-inhabited place. So you don't have the direct, exact same issue, but you have a whole lot of optimism that people are going to basically say, you know what, it's a pain in the butt to drive my car. You know, traffic is really bad on this stretch. You know, and a lot of people are taking Brightline, but just not as many as they expected would be taking Brightline, right? So there was too much optimism. The debt was all sold based on that optimism. It seems to me, you know, just that Brightline is a completely viable company, but it's not viable with this debt load that it's got on there. So there's going to be a lot of hair cutting going on, which is going to be very painful for the bondholders. Does this feel like, and again, drawing upon the historical work you've done? Does this feel like history of peat in itself or, or is it just the nature of railroad development that it's going to be something that's filled with optimism and it's just like with any project, you know, business has failed. That doesn't mean it was a bad idea, but sometimes things just don't work out because when I look at this, you know, it from a distance, hey, Miami to Orlando, okay, Orlando, the Tampa, okay, I can see that. But then there's the other part you mentioned was the projections. And it's that just, I mean, projections are issued with stadium finance for all kinds of other projects, but is there something about railroads where it's, it's a little bit more difficult? Well, it's more difficult and there's a very long history, like 150 year history of the projections being too optimistic, both in terms of the scale and also in terms of the speed with which you'll, you'll reach that scale, right? So maybe, may well be that bright line is eventually going to reach this, you know, these ridership numbers that they originally had, but it's probably not going to be until, you know, decades down the road that that happens. I mean, that is true. That was true of the Texas and Pacific railroad too. I mean, which as I mentioned is sort of the beginning of the book, that railroad actually turned out to be quite profitable, but it wasn't until the 1920s when oil was discovered in Texas and, you know, there was a real need for that railroad. So, you know, if traffic continues to get worse in Florida, probably there'll be more and more desire to take bright line, right? And that will, but it's not going to happen, you know, in the next two years probably, right? Or, you know, in any reasonable time period for when the current debt is due. So one approach may well be to do what exactly what they did in the 19th century was they basically would just refinance the bonds through the, the restructuring process and basically say the bondholders, well, we're sorry, we're not going to be able to pay this debt when it's due. Here's some new debt. Right. Right. So, take the can down the road 20, 30, 40, or in the case of the Texas and Pacific railroad, they kick the can down the road 100 years and they gave the bondholders 100 year debt to replace it. So that leads me to another question here for you. And I'm really going to be interested to see what Jay answer is because what I'm taking away from what you're saying is that specifically with railroads, that it's probably difficult for them to become profitable over, let's say, a 30 year period. 'Cause can that happen? Do they need a government subsidy during that time? I mean, is it realistic? Like, when, not so much Brightline, but with any railroad project, a passionate railroad project, is it realistic to think that over 20 or 30 years, you could become profitable or just, or the other reasons to do projects, 'cause it's good for the environment, 'cause you wanna have people have other options, so I'm just wondering what you think about that. Yeah, you know, it's challenging, right? Um, there's not a lot of examples of private, completely private rail service out there in the world. I mean, there's a few, and even those have struggled, like Eurostar, right, going between England and the continent. That had its own, you know, distress early on, and now it's sort of, it seems to have reached a level of, a level of stability that works. But yeah, you're absolutely right. I mean, there are goals in passenger rail that may be very hard to reach without some sort of government subsidy. May be very challenging to reach. Now, again, if it could work anywhere, you know, there's a few places in the U.S., where it seems like it could work. Florida might be one of them. California seems like it might be one also, and they're trying out there as well, but it's still, it's tricky to make it work, and it's always been tricky to make it work. I mean, even, right, even Amtrak is not exactly a huge money-making operation, right? They have their struggles too. Yeah, I can speak from personal experience. Amtrak, even though the new, the next-gen trains are great, but sometimes with delays and things like that. And I guess that, like with the California Exam, this will be the last question. It's just, 'cause there are complaints like with the California Project that it's an enormous amount of money to allocate to funding a railroad. And then my other thought is, well, but you can only have but so many cars on the road too. So, you know, something has to give, but I'm not sure what it is or whether, you know, people should ride more bikes or something like that, but it does seem like there's an enormous amount of investment that's required up front. That's gonna take a while for that to be repaid. Right, I mean, I think that's the real challenge with any sort of rail project. 'Cause this is a huge up front cost to get it up and running, which you don't have with a lot of other projects or not as much with other projects, right? Again, just to go back to the example of the Texas and Pacific Railroad in the 1880s. Building tracks across the entire state of Texas is, you know, is not cheap, right? Is not cheap to do that, right? You're talking about over a thousand miles of track. The problem is, is that you're not gonna have customers until you build those tracks, right? So, it's sort of a catch 22. You gotta spend all this money to develop the cash flows, but it takes a while for those to start coming in. So, and it's a similar issue with Brightline. I think, right, once they are established in the same way that like Amtrak is established in the Northeast, and people kind of think about them, okay, this is one of my options for travel, it'll just become a regular thing, and people will start to use it and that'll work. Problem is, is that they got, in the immediate term, right, this massive debt load, and they gotta do something about it. - Well, Steven, I wanna thank you for a number of reasons. One is that, you know, we've been trying to schedule this for a while, and we were actually wondering whether or not there'd be a agreement put in place. So, you've been very gracious and flexible in working with this to make this happen, because I really think this was a very thoughtful conversation based on the work that you did with your book, and I wanna wish your book the greatest success, 'cause it does, it reminds me of that old saying about, you know, if you don't know your history, then you're doomed to repeat it, and it definitely feels like anyone that's involved in Brightline probably needs to take a look at your book, and just to understand the dynamics, because I've learned a lot today about just, like this whole idea that maybe when it comes to rail, profitability is great, but it might not be the first thing that happens on the list, if I take a little while. - It takes a while to get there. I mean, the rail is even on the freight site in the US, the rail system that we have, which works pretty well, it took over 100 years to sort of sort that all out, so. - Right, and I do hope, you know, I have no opinion on Brightline, but I do hope it is successful just from the standpoint of giving people other options for travel, 'cause I think that benefits society, but, Stephen, thank you for joining us, and thanks to our listeners for tuning in to DeadWire, please subscribe and follow us on Apple Podcasts in Spotify, and we'll see you the next time. Take care. (upbeat music)