AMR’s $3.2 billion of debt backing airport facilities may not have much effect on municipal defaults this year, because it isn’t clear how much will be abandoned, according to analysts including Phil Villaluz, managing director of municipal research for Sterne Agee & Leach Inc. in New York.
AMR and American sold tax-exempt securities called special- facilities bonds through airports and municipal authorities to pay for gates and maintenance hangars in cities such as New York, Los Angeles and Dallas. American became the final large U.S. full-fare airline to seek court protection following the Sept. 11 terrorist attacks. It listed $29.6 billion in debts in U.S. Bankruptcy Court papers filed yesterday in Manhattan.
“We’re already seeing secured bonds getting hit,” Villaluz said. “The outcome will depend on whether American wants to keep these facilities or walk away.”
An unsecured bond maturing in December 2029 that backed maintenance facilities at Fort Worth’s Alliance Airport sank 67 percent to 17.2 cents on the dollar yesterday from 52.5 cents Nov. 21, data compiled by Bloomberg show. A New York City Industrial Development Agency bond maturing in August 2031 and sold for American in 2005 fell 16 percent to 75.9 cents on the dollar from 94 cents Oct. 27. The bonds are secured by leases.
Meredith Whitney, the banking analyst who correctly called Citigroup Inc.’s 2008 dividend cut, last year predicted “hundreds of billions of dollars” of municipal defaults this year. Bondholders may not know whether payments will be missed on their investments until Fort Worth-based AMR decides what it plans to do with facilities financed with the debt, said Richard Lehmann, publisher of the Distressed Debt Securities Newsletter.
“It’s a huge amount of debt,” Lehmann said by telephone from Miami Lakes, Florida. “Whether they suspend debt is the question. I don’t think they will, because they will need these gates.”
AMR lists on its balance sheet the $1.6 billion it guarantees. The rest relies on leases and other financing structures for the facilities it financed. The company may try to use the bankruptcy to wipe out some of its debt, yet if it decides to continue operating in a city, it probably will cover payments tied to that area, said James Spiotto, a partner with Chapman & Cutler in Chicago. He has worked on municipal bond holdings involving other airlines that entered bankruptcy.
“If it’s a needed facility they will stick with it,” said Spiotto. “If it’s a popular destination, other airlines may come in and take it over.”
Recovery rates on municipal bonds backed by bankrupt airlines can vary depending on their structure, said John Miller, co-head, global fixed income, at Nuveen Asset Management in Chicago. Investors got 100 cents on the dollar plus accrued interest on United Airlines’ Denver airport facility-backed bonds. However, there is a possibility American could leave some airports, or, if it decides to stay, to seek lower lease payments.
Such negotiations carry risks for American, because if the talks don’t succeed, the carrier may be forced out of certain airports, Miller said. His company has about $240 million in debt related to American, spread over 30 funds.
“It’s way too soon to have any sense of whether they’re going to be fighting with creditors over these leases,” Miller said. Generally, lease-backed structures have a “considerably higher” recovery rate in airline bankruptcies, he said.
“Those are important places for American Airlines to be operating and I believe they wouldn’t want to give up those facilities to competitors,” Miller said. Holders of those bonds should receive “pretty meaningful” recovery, he said.
Investors with American’s unsecured debt should get more back than those that held similar United securities, because both United and the airline industry were in a weaker financial position in the years following the 2001 terrorist attacks, Miller said. Oppenheimer Funds holds about $1.1 billion of American-backed municipal bonds, the most of any mutual fund family, according to data compiled by Bloomberg.
Sam Wang, an Oppenheimer spokesman, didn’t respond to a telephone message seeking comment on the holdings.
“The bankruptcy and uncertainty it brings for the unsecured bonds in particular could have a significant negative impact,” J.R. Rieger, vice president for fixed-income indexes at Standard & Poor’s, said in a statement. He said 29 American- backed securities are included in the company’s Municipal Bond Index, amounting to less than 0.3 percent of its value.
Some unsecured securities for maintenance facilities at Fort Worth-owned Alliance fell more than 80 percent after the bankruptcy filing, according to data compiled by Bloomberg. Holders of the company’s unsecured debt may recover “next to nothing” because of the bankruptcy, Fitch Ratings said yesterday in a report.
Alliance officials don’t expect AMR to abandon the airport, said Jay Chapa, Fort Worth’s housing and economic director. “My understanding is that American will continue to operate as normal while they restructure,” he said.
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