BBB to CCC+ in twenty-four months

My father did this.

Every year he moved a little more money into municipal bonds. He always said the same thing about them. This is the part you don't have to watch.

He liked that they were dull. The money went to school roofs and water pipes, and the interest came to him tax free.

I thought about him this month while reading a bond filing from Florida.

In 2024, a state agency called the Florida Development Finance Corporation sold $2.2 billion of tax-exempt bonds on behalf of a private railroad. The borrower was Brightline Trains Florida, which runs 235 miles from Miami to Orlando International Airport.

The agency does not owe a dollar of it. It lends its tax exemption to companies and passes the money through. When Brightline announced an earlier deal, the company said the bonds were not backed by federal, state or local government and posed no risk to taxpayers.

The ratings firm KBRA called that 2024 debt investment grade. BBB.

In February it cut the same bonds to CCC+. Fitch had already cut them to CCC in January.

So, the train. In 2025, its second full year running to Orlando, Brightline carried 3.1 million passengers and collected $214 million. The bond documents had forecast 6.6 million passengers and $697 million a year.

Since January the company has been taking grace periods on payments it cannot make. Seven days at a time, over and over. Its auditor, Ernst & Young, wrote in the 2025 accounts filed with the municipal disclosure system that substantial doubt remains about the company's ability to continue as a going concern.

Bloomberg reports it is shaping up as one of the largest municipal restructurings ever, alongside Detroit and Puerto Rico.

A private railroad borrowed in the safest market in America, and the market let it.

Invesco and Nuveen lead the group holding the senior bonds. First Eagle is in there too. These are ordinary fund families, and their funds sit in ordinary retirement accounts.

I have no idea how this ends for them. Assured Guaranty insures $1.13 billion of the senior debt and will pay if it has to.

But Brightline owes about $5.5 billion in all. That includes $1.2 billion of subordinated tax-exempt bonds sold without a rating, $985 million of separate commuter bonds, and $1.1 billion of taxable notes now held by hedge funds.

Nobody insured any of that. It is the part my father would have called the safe money.

This is how private companies get into the tax-exempt market at all.

The Florida Development Finance Corporation describes itself without decoration. It is a state-authorised issuer of industrial revenue bonds. It takes no state appropriation. It issues in counties across Florida through agreements with local governments, and it helps for-profit and not-for-profit businesses reach the capital markets.

The pitch to a borrower is the tax break. The agency's own materials note that it charges no annual issuance fee and can offer tax-exempt terms of up to 35 years, which lowers the interest the borrower pays.

The instrument is called a private activity bond. Congress permits it for projects said to carry a public benefit, and passenger rail is on the list.

Every state has an agency like this. Most have several. They are the doors through which charter schools, hospitals, senior housing developers, recycling plants and toll roads walk into a market ordinary savers think of as government debt.

The agency's name goes on the bond. The agency's balance sheet does not.

And here's where it spreads.

Charter schools borrow through the same doors. An agency issues the bonds, the school promises to pay out of its per-pupil funding, and the paper lands in high-yield municipal funds.

So far this year, charter schools have produced more defaults than any other municipal sector, according to Municipal Market Analytics.

In July, Palm Bay Academy in Florida became the latest. Its bonds were sold without a rating. They first went impaired in September 2020, which means the trouble sat in plain view for close to six years before the default arrived.

Florida ranked second in overall municipal defaults in 2025 and tied for third this year through July 7.

The rating agencies see it. As of mid-May, S&P held negative outlooks on 13% of the charter schools it rates and positive outlooks on 5%. It pointed to soft enrollment, higher staff and operating costs, and heavier debt loads.

A school cannot raise taxes. When the students stop arriving, there is nothing else to pay with.

Meanwhile, the insurance that used to sit under all of this has shrunk.

In 2005, insurance covered 57% of new municipal issuance. Nine firms wrote it, and seven of them were rated AAA.

In the first half of 2026 it covered 6.2%, according to Municipal Market Analytics. Two insurers are left, Assured Guaranty and Build America Mutual, and both are rated AA.

The direction is still down. Penetration was 8.2% in 2024 and 7.5% in 2025. The two insurers wrapped $18.0 billion across 819 deals in the first half of this year, against $22.0 billion across 878 deals a year earlier.

There is a cross-border wrinkle. Assured Guaranty's book is not only American. The UK water sector accounts for roughly 6% of its total net par outstanding, spread across 15 separate obligors, with maturities running out to 2062.

So the same balance sheet standing behind American schools and toll roads also stands behind British water companies, several of which are working through debt problems of their own.

For everything uninsured, and that is now almost all of it, the loss goes straight to the fund.

Three more things worth keeping track of.

Thames Water raised customer bills 31% in April, and revenue rose about 40% to nearly £2 billion. It still carries roughly £17.6 billion of net debt, and it has warned that special administration, a temporary form of public control, could arrive in the very near term. Its creditors are hedge funds, led by Elliott and Silver Point. The company reported paying £57 million in advisory fees to bankers, lawyers and public relations firms over the period. South East Water has flagged uncertainty over its own funding beyond July 2027.

American municipal issuers spent years being upgraded more often than downgraded. That has turned. S&P downgraded more municipal credits than it upgraded in five of the six months through April, according to Breckinridge. The downgrades cluster in education, including private colleges and ordinary public school districts, where enrollment keeps falling.

July was a rates month rather than a growth scare. Long Treasuries lost 4.47% while high-yield corporate bonds lost only 0.25%, and the 30-year yield reached its highest level since 2008. Three Fed officials dissented in favour of a hike. When the long end moves that far and credit refuses to flinch, the pressure turns up later, in whatever borrowed at the long end. We'll see.

In the 1850s, American towns wanted railroads.

A railroad meant your town survived. No railroad meant it emptied out. So the towns voted to borrow money and hand it to private railroad companies.

Iowa went further than most. By 1856 its municipalities had committed more than $7 million to railroad subscriptions, on an estimate given by Governor James Grimes.

Then the railroads underperformed, or failed, or never got built at all. The towns kept the debt and the taxes that paid it.

Dubuque tried to walk away. In 1859 the Iowa Supreme Court agreed with the city, ruling that the legislature never held the power to authorise those bonds in the first place.

A German investor named Herman Gelpcke owned some of the paper. He appealed to the United States Supreme Court.

In Gelpcke v. Dubuque, decided in 1863, the Court sided with the bondholder. It set the state ruling aside and held the city to the debt.

The town could not pay, and the Court made it pay anyway.

That was only the opening. Between 1860 and 1896 the Supreme Court decided more than 300 cases on towns, cities and counties trying to escape bonds they had issued to help private railroads. Repudiation became a mass movement after the Panic of 1873.

It got ugly. In 1869 the Dubuque Herald reported that the bond rulings had brought Iowa to the edge of rebellion, and President Grant threatened federal troops to enforce the tax collection that paid the creditors.

The federal tax exemption is newer than any of that. The arrangement underneath it is not. A government lends its name to a private business, an investor buys the paper because the name sounds safe, and the argument over who pays begins only after the project disappoints.

It took the Court thirty-six years to work through the last round of it.

Nobody is counting yet. We'll see.