Investors Just Threw A Ton Of Money At Unusually High-Risk Bonds For A Project That Doesn't Make Money
Investors just took on a ton of risk to finance a new Florida passenger railway project being undertaken by Fortress Investment Group, reports Reuters' Natalie Harrison and Shankar Ramakrishnan.
The project, called All Aboard Florida, plans to use existing freight railway on the east coast of Florida to carry passengers.
Reuters said the project does not yet have any cash flow and is already facing some political push back.
Fortress sold $405 million worth of debt, some of it in the form of "payment-in-kind" notes, or bonds that don't pay a bondholder anything until they mature.
These notes are deeply subordinated in the capital structure. This means that there's a long line of senior debtholders who have to get paid before these subordinated investors are considered. This is a particularly disadvantaged position in the capital structure during bankruptcies.
The report quoted one banker close to the deal that asked, "Where can you get 12% yield?" The banker said, "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."
Reuters noted that the bonds are selling for more than 100 cents on the dollar in the secondary market, indicating strong demand for this type of debt.
In short, investors are looking everywhere and anywhere to get a decent return on their capital in this.
Some market watchers, however, will see this hunger for high risk as a sign of complacency and recklessness in the financial markets.
(Reuters via @EpicureanDeal)