American Airlines Chapter 11: Holders Of Different Notes [ANALYSIS]

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American Airlines Chapter 11: Holders Of Different Notes [ANALYSIS]

The number of large bankruptcy cases has dwindled in the past two years. In fact, the number of bankruptcy filings has decreased in the past years following the 2007 recession because there was a decrease in the accumulation of debt. This trend in bankruptcy filing became a problem to distressed-debt investors who look into the size of a bankruptcy to determine its potential for investment. The Chapter 11 filing then of American Airlines in late November 2011 brought excitement to distressed-debt investors.

American Airlines, which listed $24.7 billion in assets and $29.5 billion in liabilities, was in a way late in seeking bankruptcy protection as almost all major airlines in the United States already filed for and emerged from bankruptcy prior to 2009. Like all other airline companies before it, American Airlines, its parent, AMR Corporation (PINK:AAMRQ), and their affiliates, filed for bankruptcy to restructure their debts that was caused and worsened by stiff competition and the Sept. 11 terrorist attacks. American Airlines could not be considered one of the biggest bankruptcy busts in history, paling in comparison to Lehman Brothers Holdings Inc. (PINK:LEHMQ) or MF Global Holdings Ltd (PINK:MFGLQ) in terms of pre-bankruptcy assets. Nevertheless, the bankruptcy filing was welcomed by distressed-debt investors.

US Airways Group, Inc. (NYSE:LCC) has been pushing for a merger with American since January this year, and in recent months, US Airways has pushed for more aggressive talks regarding a possible merger. This merger will result to the combined airlines becoming the world’s biggest airline in terms of passenger traffic, surpassing United Continental Holdings Inc (NYSE:UAL). To note, mergers between and among airlines are not new. In fact, United Continental Holdings Inc (NYSE:UAL) is a result of a merger between United and Continental Airlines. Mergers have become quite a trend in the airline industry where airlines see consolidation as one of the best ways for them to successfully compete with each other. Mergers are also seen by bankrupt airline companies, such as Delta Air Lines, Inc. (NYSE:DAL) and Northwest Airlines, and other smaller bankrupt airline companies, as a way out.

American Airlines has maintained that it is still considering emerging from bankruptcy as a stand-alone company. In fact, the airline has opened itself to funding opportunities and several bondholders committing themselves to providing as much as $1 to $2 billion to finance the company’s emergence in exchange for equity ownership in the reorganized company although these bondholders are also open to a merger between American and US Airways and have also demanded for a new board of directors upon American’s emergence. These bondholders, which include Pentwater Capital Management LP, Litespeed Management LLC and J.P. Morgan Securities, formed an ad hoc group of holders of more than $800 million of American’s debt. Goldman Sachs Group, Inc. (NYSE:GS), Avenue Capital Management, and Barclays Asset Management Group recently joined the ad hoc group. Analysts said that if the ad hoc group combines with the independently-represented bondholders, they could block any deal and steer any reorganization plan negotiation towards a path more favorable to them. Appaloosa Management LP is also a major bondholder in AMR Corporation (PINK:AAMRQ), although it is not part of the ad hoc group. David Tepper’s Appaloosa hedge fund holds bonds issued by both AMR and US Airways.

In pursuit of its intent to emerge as a standalone company, American has also successfully renegotiated its agreements with several workers’ unions. American’s CEO has said in early December that a reorganization plan is almost completed, although analysts are wary of the airline’s success in emerging as a standalone company, noting that its size, profitability, labor relations and reorganization strategy may hinder American’s plan to emerge as a standalone company.

US Airways may be bullish though regarding the merger as it has bought some $1 million of AMR’s 6.25% Convertible Notes in order to become a creditor of the company, engaged AMR’s creditors in merger talks, and recently, American Airlines’ pilot union groups in the confidential merger talks. The inclusion of the pilots in the merger talks boosted confidence among investors on a possible merger, causing AMR Corporation (PINK:AAMRQ)’s debt to rise the highest in more than 16 months. Specifically, AMR’s $460 million of 6.25% Convertible Notes due 2014 rose 1.2% to 83 cents on the dollar at 12:40 p.m. on Dec. 13, a significant increase from the 17.75 cents trading price after the airline’s bankruptcy filing.

AMR may accept a merger offer by Christmas, according to Vicki Bryan, senior bond analyst with Gimme Credit LLC. Analysts also said Delta’s plan to buy a 49% stake in Virgin Atlantic may put a competitive pressure over AMR Corporation (PINK:AAMRQ), which could possibly hasten its decision to accept US Airways’ merger offer.

Prior to the airline’s bankruptcy filing, it had approximately $10.9 billion in debt obligations, consisting of secured variable and fixed rate indebtedness, enhanced equipment trust certificates, special facility revenue bonds, 7.50% senior secured notes, 6.25% senior convertible notes, debentures, and notes. Most of the debt are publicly traded. According to a regulatory filing with the U.S. Securities and Exchange Commission, American’s 7.50% Senior Secured Notes due 2016 has an appraised value of the collateral at $2,575,893,000, using a discount rate of 11.5% and a perpetuity growth rate of 1.5%.


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