American Airlines Plans First Debt Since January as Risk Rises

AMR Corp. (AMR)’s American Airlines may pay up on its offering of $725.7 million of debt backed by airplanes in its first such offering since January as the cost to protect against a default on its bonds rises.

The 10-year pass-through certificates will be used to finance aircraft, the company said today in a filing with the Securities and Exchange Commission. American Airlines has $828.8 million of 7.858 percent pass-through certificates maturing on Oct. 1, rated Ba1 by Moody’s Investors Service and BBB- by Standard & Poor’s, according to data compiled by Bloomberg.

Investors are paying the most to protect against a default on bonds from Fort Worth, Texas-based AMR for five years than other major U.S. airlines, according to data from London-based CMA, as the owner of American Airlines failed to post an annual profit for three consecutive years. AMR will need to refinance aircraft supporting the maturing debt with a new bond deal, which is likely to yield about 8 percent, JPMorgan Chase & Co. analysts said in a Sept. 23 note.

“A successful execution of this anticipated deal is critical in our opinion to AMR’s ability to manage its liquidity during the winter months,” JPMorgan analysts Jamie Baker, Scott Tan, Joseph Abboud and Mark Streeter wrote in the note. “Assuming AMR pulls the trigger on a new deal near this pricing, AMR will pay a steep price for not having issued earlier in the year to refinance this maturity when the markets were more receptive.”

Credit-Default Swaps

Credit-default swaps on the parent of American Airlines soared to 49.5 percent upfront yesterday from 29.25 percent on Aug. 1, according to CMA. That means it costs $4.95 million upfront and $500,000 a year to protect $10 million of debt for five years, the highest of the major U.S. airlines tracked by the CME Group Inc. unit.

That compares with about 18 percent upfront for Delta Air Lines Inc. (DAL) and United Continental Holdings Inc. (UAL), the JPMorgan analysts wrote in the Sept. 23 note.

Speculation that AMR may seek bankruptcy protection “weighs on the entire sector, along with, of course, the natural market fear of a recession and the potential impact from an economic slowdown on an improved but still vulnerable sector,” the JPMorgan analysts wrote. “We remain in the minority camp that AMR will continue to tread water and avoid an in-court restructuring.”

American Airlines last tapped the U.S. debt market in January, issuing $503.21 million of 10-year, 5.25 percent second-lien pass-through debt and $153.83 million of seven-year, 7 percent first-lien pass throughs, Bloomberg data show.

Today’s debt is expected to be graded Baa3 by Moody’s and A- by S&P, said a person with knowledge of the transaction, who declined to be identified because terms aren’t set.

Relative yields on BBB rated corporate bonds expanded to 306 basis points yesterday from 211 basis points at the start of the year, according to Bank of America Merrill Lynch index data.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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