Even as Brightline Florida chugs towards bankruptcy court to restructure its USD 5.5bn debt pile, its complex structure and divergent creditor interests could lead some entities to out-of-court deals.

By 1 July, the Fortress Investment Group-backed operator of a passenger railroad that connects Orlando and Miami, Florida, must make interest or redemption payments  payments on USD 2.219bn Series 2024 tax-exempt project owner bonds, USD 1.119bn taxable corporate notes and USD 985m Series 2025B commuter rail project tax-exempt bonds.

Earlier this month, the company said it may be compelled to pursue additional restructuring initiatives, “including possible out-of-court restructurings or in-court relief,” if unable to obtain additional financing or extend certain debt.

The situation is further complicated by the lack of cross-default provisions and multiple borrower entities with a fragmented collateral base that the company tapped to raise billions in financing to build out the rail line.

Brightline has repeatedly missed its projections and continues to post losses. In a filing yesterday (29 June), the project owner posted a 1Q26 net and comprehensive loss of USD 54m, down from USD 60.2m in 1Q25.

Unless Brightline has enough collateral to pull off a last-ditch liability management exercise, it looks like the group will need to restructure in a Chapter 11 bankruptcy, said Stephen Lubben, a Seton Hall law professor.

Subchapter IV as alternative path

While Chapter 9 of the Bankruptcy Code for municipalities does not apply to Brightline, a lesser-known route in Subchapter IV of Chapter 11, which addresses railroad reorganizations, could come into play. The subchapter requires the appointment of a trustee to preserve “public interest” in the railroad, according to Lubben, potentially affecting negotiations with creditors and the pace of any restructuring.

Though the separate subchapter acknowledges that railroads are not as central to the American economy as they were in the 19th century, they are still very important, Lubben said. “Not only for the customers of the railroad, but also the local communities through which they run suffer if the railroad shuts down.”

Whether Brightline could or would avail itself of Subchapter IV remains an open question. Lubben pointed to the Las Vegas Monorail as the closest recent precedent for a private passenger rail restructuring, noting it did not file under Subchapter IV. Given the general lack of private passenger rail service in the US, there would be few recent precedents for a Brightline-like case, he added.

Structure and creditor dynamics

Where a potential Chapter 11 filing could land is not straightforward given what a bankruptcy attorney described as an “incredibly complex” structure spanning more than two dozen limited liability companies across project owner, holding, and commuter rail layers, each with distinct creditor bases and collateral packages.

The most natural filing candidate is the operating company, Brightline Trains Florida LLC, which sits at the core of the structure and is backed by a substantive collateral package including real estate, rolling stock, equipment, and project revenues from the Miami-Orlando route. However, much of that collateral is leased or easement-based, complicating enforcement or any debtor-in-possession (DIP) financing scenario.

Assured Guaranty Municipal (AGM), which insures approximately USD 1.13bn, or roughly 51%, of the USD 2.219bn Series 2024 tax-exempt project owner bonds, effectively controls remedies at that level. “AGM holds a lot of the cards. I wouldn’t imagine they would force a bankruptcy at this stage,” said a senior municipal bond analyst.

AGM’s potential role in any DIP would be a key consideration, including whether it provides new funding or continues supporting bondholder payments under the existing policy, the bankruptcy attorney said.

Assured Guaranty president and CEO Dominic Frederico said earlier this year that the insurer does not view Brightline as a loss situation, citing collateral value of at least USD 2.4bn.

Brightline East LLC, the parent of the project owner and borrower on USD 1.119bn in taxable corporate notes, is another likely Chapter 11 candidate. However, a default at the Brightline East level would not cross-default to the project owner’s obligations, according to Fitch, giving the two creditor groups structurally separate, if potentially intertwined, paths.

The holders of the corporate notes, which last traded at 8.88 on 29 June, may pursue a different strategy, potentially contributing equity and restructuring in exchange for upside, the bond analyst said.

AAF Operations Holdings LLC (AAFOH), the borrower on the USD 925m Series 2024 and USD 285.7m Series 2024A bonds, is likely an out-of-court restructuring candidate, as its collateral consists primarily of membership interests in Brightline East and Brightline Tampa, neither of which provides a direct claim on the Miami-Orlando project’s operating assets. The company has already deferred two consecutive interest payments, and a third missed payment on 15 July could constitute an event of default.

Similarly, the USD 985m Series 2025B commuter bond borrower, Brightline Florida Holdings LLC, sits above AAFOH, but the debt collateral remains largely theoretical, tied to future county access payments that have yet to be contractually established.

The AAFOH and commuter bondholders are in a weak but concentrated position, making an out-of-court agreement more likely than forcing a default, according to the analyst. “It doesn’t seem like it’s in (bondholders’) best interests to force the issue,” the analyst said, noting that accelerating the bonds would ultimately be self-defeating.

Inter-creditor tensions

The divergent interests across Brightline’s lien structure raise the prospect of inter-creditor conflict, including the potential for “some creditor-on-creditor violence,” the analyst said.

A subset of bondholders willing to provide a DIP may seek to roll up their bonds, potentially leaving other holders behind, the bankruptcy attorney said.

Distressed debt and hedge funds among corporate noteholders remain among the most litigation-prone creditor classes, with enforcement a possibility even where collateral is weak, the bond analyst said. Investors who bought bonds at 30 to 40 cents on the dollar may push for recoveries closer to 50 cents.

With over USD 1.5bn in payments past or imminently due, Brightline’s margin for progress is narrowing fast. A likely scenario is a restructuring with fewer near-term debt service requirements, the bond analyst said. “Maybe there’s some type of haircut involved for the bondholders,” he added.

One potentially comparable story comes from the 2024 Chapter 11 bankruptcy of wood pellet manufacturer Enviva. The company issued taxable and non-taxable bonds to fund the build out of wood pellet facilities but ran into liquidity problems. Creditors agreed to a restructuring that largely equitized the capital structure, paid out unused construction funds to muni bondholders, and raised fresh equity to support an exit from bankruptcy.

The parallels with Brightline are limited, though, given Enviva involved a far simpler asset base than Brightline’s labyrinthic structure.

“Nothing’s quite like Brightline,” the bankruptcy attorney said.

Brightline Florida did not respond to a request for comment.