American Airlines Sued by Bond Trustee Over Finance Plan

AMR Corp. (AAMRQ)’s American Airlines was sued by a noteholder trustee that says American is required to make a payment owed to investors under the airline’s plan to borrow $1.5 billion and repay debt.

U.S. Bancorp, the trustee for $174.2 million of 13 percent secured notes due in 2016, wants a court order that American is required to pay a make-whole amount under the refinancing plan, according to documents filed yesterday in U.S. Bankruptcy Court in Manhattan.

AMR, based in Fort Worth, Texas, said in October that it’s seeking court permission to borrow $1.5 billion backed by aircraft and redeem existing debt to take advantage of lower interest rates.

U.S. Bankruptcy Judge Sean Lane heard arguments today from lawyers for the airline and U.S. Bancorp about the financing request. He said he will rule “as quickly as possible.”

At the hearing in White Plains, New York, Lane granted American’s request to extend to Jan. 28 the company’s exclusive right to file a reorganization plan. The extension, supported by the committee representing unsecured creditors, prevents competing plans from being considered by the court.

American, which filed for bankruptcy last November, also won approval for a settlement that restructures financing agreements for regional aircraft. Lane approved the deal after American resolved objections from hedge fund Marathon Asset Management.

Transferred Debt

Marathon was seeking a court-ordered investigation into a deal in which American assumed $2.26 billion of debt that American Eagle owed in exchange for regional jets that were transferred to American.

Under the $1.5 billion financing plan, AMR is seeking permission to redeem $445.6 million of 10.375 percent pass- through certificates, the $174.2 million of 13 percent secured notes and $703.6 million of 8.625 pass-through certificates, “without the payment of any make-whole amount” or “any other premium or prepayment penalty,” it said in court papers.

Make-whole provisions, under which investors receive a premium if the securities are redeemed early, are included in credit agreements to create a disincentive for borrowers to call bonds before their scheduled maturity. Lenders would rather keep the current high-coupon debt than have to reinvest the cash into lower-yielding notes.

American says the refinancing could save the company more than $200 million in interest expense.

The case is In re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.