As with any investment, your capital is at risk. Past performance is not a guide to future returns.
Brightline East, the first private high-speed rail system in the United States, is revolutionising travel along Florida's bustling East Coast. Connecting major cities from Miami to Orlando, this innovative project taps into the state's robust population growth, thriving tourism industry, and expanding economy.
For Baillie Gifford’s Multi Asset portfolios, Brightline East presents a unique opportunity to participate in a high-yielding transformative infrastructure project with significant potential for returns.
On track for growth
Brightline East addresses a critical transportation need in the "too long to drive, too short to fly" market segment. With Florida experiencing rapid population growth and record-breaking tourism numbers, the demand for efficient inter-city travel is higher than ever. The project's strategic positioning in this high-growth corridor sets the stage for robust ridership and revenue growth.
Brightline offers a three-hour Miami-to-Orland trip, outpacing congested highways and often delayed air travel. This competitive edge, combined with centrally located stations and an unregulated pricing model, provides the flexibility to optimise fares and capture market share.
While still in its infancy, Brightline East shows promising revenue potential. Management has been able to increase rail fares with little effect on passenger numbers and revenue from ancillary services. They are looking to gradually shift towards a majority long-haul passenger mix, a much higher-yielding customer base.
Our base case scenario assumes the company will move towards profitability in 2025, with cash flow generation improving as the service matures and capacity expands. With significant pre-funded interest reserves providing a cushion during the ramp-up phase, Brightline has time to optimise operations and grow its ridership base.
Full speed ahead
As the only private high-speed rail in the US, Brightline East enjoys a first-mover advantage in a rapidly growing region with limited competition. With numerous private equity backers, Brightline has substantial financial support to drive its growth strategy.
Part of that strategy involves expanding the network both east and west. Plans for a Tampa extension and the separate Brightline West project (Los Angeles to Las Vegas) demonstrate the company's ambition and potential for long-term growth beyond its current network.
Customer satisfaction is high, as evidenced by strong net promoter scores and significant growth in ridership numbers. Additionally, the existing fleet of passenger cars will be expanded in 2025, further increasing capacity to meet demand.
A ticket to potential returns
The Multi Asset Team’s investment is in the company’s high yield bonds, which currently yield close to 14 per cent. While Brightline’s expansion project still has execution risks and is yet to turn a profit, we believe the market is focussing on the short-term and is overly cautious in its analysis. In our view, the outlook for the company is positive, supported by:
- Strong structural demand in Florida's growing market
- Significant pre-funded interest reserves providing near-term payment security
- A supportive sponsor with deep pockets, for whom this is a flagship project
Our conservative financial projections give us conviction that the project is robust, while also leaving ample room for outperformance as credit metrics improve.
A first class opportunity
An important feature of Baillie Gifford’s Multi Asset portfolios is their ability to own only assets that are attractive within their class.
Our overall view of high yield credit is cautious, given that spreads are near historically low levels. However, Brightline East offers a distinctive opportunity within that. As a result, we have made a bold, direct investment in the issue at a size close to 20 per cent of our overall high yield credit allocation.
As the company continues to expand its ridership and optimise operations, we expect to benefit from both an attractive yield and price appreciation as the credit profile improves.
Brightline East represents not just an investment in a rail system, but a stake in the future of American transportation infrastructure. For investors willing to embrace the risks of a project in its growth phase, Brightline East offers a compelling ride towards potentially significant returns. All aboard!
Risk factors
This communication was produced and approved in November 2024 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking.
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this communication are for illustrative purposes only.
Important information
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Financial intermediaries
This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.
