AMR Bond Ascension Points to Eventual US Airways Merger
The most-actively traded debt, $460 million of 6.25 percent convertible, unsecured notes due 2014, have almost quadrupled to 66 cents on the dollar from 17.75 cents on Nov. 29, when AMR filed for bankruptcy, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt jumped 3.3 cents on July 19 after the chief executive officers of the airlines met to discuss a merger.
US Airways CEO Doug Parker is negotiating directly with AMR bondholders outside of the court process, and David Tepper’s Appaloosa Management LP has teamed with other investors to push for a bigger payoff. Fort Worth, Texas-based AMR is pursuing a stand-alone strategy that includes boosting revenue, a course that Vicki Bryan of New York-based debt researcher Gimme Credit LLC said isn’t seen as viable by bond owners.
“The fact that the bonds are recovering shows that the unsecured creditors think there will be a deal,” Bryan, a senior bond analyst, said in a telephone interview. “No one is confident about their revenue generation plan. It’s worth more only on the idea that someone else will buy it.”
AMR sought Chapter 11 in November after three consecutive years of losses and sitting out a round of industry consolidation that saw American fall to third place in the U.S. behind United Continental Holdings Inc. and Delta Air Lines Inc.
Much of the increase in the convertible bonds is due to American’s push to freeze rather than terminate its pension plans, which removes a potential claim on assets, according to Mark Streeter, an analyst at JPMorgan Chase & Co. American’s efforts to cut costs by renegotiating union contracts have gone better than expected as well, he said.
The company, which traces its roots to 1920s air-mail operations in the Midwest that included the aviation pioneer Charles Lindbergh, listed $24.7 billion in assets and $29.6 billion in debt in its petition for court protection from its creditors. Unsecured debt accounts for $840 million of that, according to data compiled by Bloomberg.
AMR last week posted a quarterly profit of $95 million, excluding bankruptcy-related costs, and said sales rose to a record of $6.45 billion with higher fares. The bonds were also boosted by the improved results, according to Ray Neidl, an airline analyst with Maxim Group LLC.
“There’s confidence in the value of the reorganization with or without an acquisition,” Neidl said. “Those bonds started recovering long before US Airways stepped in because there was confidence in the recovery. The extra mileage in the increase is the US Airways potential acquisition.”
AMR debt holders have organized outside the carrier’s official unsecured creditors committee, creating two ad hoc groups to gain leverage, according to people familiar with the matter who declined to be identified because the discussions are private.
The group including Appaloosa holds $700 million of corporate debt and has hired law firm White & Case LLP and financial adviser Houlihan Lokey, the people said. The other includes OppenheimerFunds Inc., the largest holder of AMR’s municipal debt, and has retained law firm Kramer Levin Naftalis & Frankel LLP and financial adviser Seabury Group LLC, the people said.
US Airways in April reached contract agreements with the unions for American’s pilots, flight attendants, mechanics, baggage handlers and other airport ground workers that are contingent on a combination of the two carriers. Since then, the Tempe, Arizona-based airline has been lobbying AMR creditors.
“The case will come to a point sooner or later where US Airways’s offer is going to be weighed,” Max Newman, a bankruptcy attorney at Butzel Long in Bloomfield Hills, Michigan, said in an interview. “The union support for US Airways is going to be a major factor. Now they just have to sit on their hands and wait a little bit.”
The bondholder group working with Appaloosa, which has met with AMR CEO Tom Horton and Chief Restructuring Officer Beverly Goulet, agreed last month to consider the stand-alone plan before reviewing a possible merger.
Bondholders have “nothing to lose” from considering an offer from US Airways that will probably be “too good to pass up,” Dan McKenzie, an analyst at Rodman & Renshaw in New York, wrote today in a report. He estimated that there’s a 55 percent chance the deal will succeed.
Horton has said he’s not yet convinced his airline must merge to restructure or that US Airways would be the best partner. Parker last week said he won’t wait indefinitely for a deal, which should occur while AMR is in Chapter 11. A tie-up would surpass United as the world’s biggest airline by traffic.
Combining US Airways and American is the only way to create an airline with the scale and breadth of network offerings to compete with United and Delta, Parker has said.
US Airways hasn’t made a formal merger bid and is waiting for AMR to set terms that would allow rivals to scour its financial information to decide on a possible offer. Horton told Parker at a July 19 breakfast meeting at a Washington hotel that AMR won’t be rushed into any merger, people familiar with the matter said at the time.
U.S. Bankruptcy Judge Sean Lane that same day extended to Dec. 28 the company’s exclusive right to propose a plan to restructure and exit bankruptcy protection. After the exclusive period expires, creditors and other parties may propose reorganization plans.
“If American doesn’t merge with US Airways, we’re not going back to 20 cents,” said JPMorgan’s Streeter. “American on a stand-alone basis can still create a recovery that isn’t that far off from where we are right now.”
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