California delays Vegas train decision pending Federal clarity

California officials on Wednesday postponed to February a decision that would have cleared the way for Virgin Trains USA to sell as much as $2.4 billion in tax-exempt debt for a railroad to Las Vegas after learning the project has yet to secure a key federal approval.

The company, backed by Fortress Investment Group’s private equity funds, plans to build a rail line to the gambling mecca from Apple Valley, a desert town 90 miles (145 kilometers) northeast of Los Angeles. The project, which has been in the works for more than a decade under different owners, still needs final approval from the Federal Railroad Administration. In a letter to the company dated Wednesday, the agency said it’s “continuing to analyze whether the current project modifications trigger the need for additional environmental review.”

Representatives from Virgin Trains and its underwriter Morgan Stanley tried to reassure members of the California Debt Limit Allocation Committee that investors would still buy the securities before a final federal decision. The committee had given preliminary approval in September contingent on receiving an economic development analysis and an update on its status with the federal government.

“The federal government can change its mind fairly quickly as we’ve seen,” Gayle Miller, Governor Gavin Newsom’s representative on the committee, said during the meeting in Sacramento Wednesday, adding that she would like to see some assurance of federal approval “for the integrity of the project and the jobs reliant on it and the precious bond cap.”

Bonds in Demand

The $4.8 billion project depends on the low-cost financing from private activity bonds, which states sell for publicly desirable ventures. But only a certain amount of such debt can be granted in each state annually under population-based limits. Since California’s committee earlier decided to designate some of capacity for the train, there isn’t enough for some affordable housing developers—who also rely on the bonds—and delaying projects in a state that has four of the five most expensive housing markets.

By getting $600 million of California’s allocation for private activity bonds, the company can leverage that four times to $2.4 billion in bonds because of federal rules extending that special boost to railroads. A California agency, combining that with a federal allocation, would issue as much as $3.2 billion of tax-exempt debt on the train’s behalf. The company is also asking Nevada to sell up to $800 million for the railroad, plus another part of the federal allocation, so the company’s tax-exempt financing plans total $4.2 billion. Virgin Trains would be on the hook for debt payments, not the government agencies selling the bonds.

The company was planning to start selling the California portion of the debt in March, and the committee’s postponement to February doesn’t necessarily put that off track, said Husein Cumber, chief strategy officer for Florida East Coast Industries, after the meeting.

Delays aren’t unusual for Virgin Trains, which experienced them for its inaugural line in Florida, resulting in ridership falling short of projections. The company is building more stations there to boost its numbers.

Virgin Trains says its project will generate jobs and housing as well as reduce pollution by getting cars off the road.