AMR Wins Appeal in Dispute Over Make-Whole Payment

AMR Corp. (AAMRQ), the parent of American Airlines, wasn’t required to pay a make-whole amount to noteholders when it called bonds early to arrange $1.5 billion in aircraft refinancing, an appeals court ruled.

AMR, which filed for bankruptcy in 2011, sought court approval for the financing to take advantage of lower interest rates, saying it may save more than $200 million in interest expense. The airline said it would use proceeds to repay about $1.3 billion in debt backed by aircraft under three series of notes.

That request was approved in January by U.S. Bankruptcy Judge Sean Lane in Manhattan, who overruled an objection from a noteholder trustee that said the company must pay a make-whole premium when it refinanced. The U.S. Court of Appeals in Manhattan today upheld that decision.

“American’s voluntary petition for bankruptcy triggered a default and automatically accelerated the debt, the satisfaction of which requires no make-whole payment,” the appeals court said, citing the language of the indentures.

AMR is going before Lane today to seek approval for its reorganization plan, which hinges on a merger with US Airways Group Inc. The U.S. government has sued to block that combination, saying it will harm consumers.

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.

Trustee U.S. Bancorp had sued the Fort Worth, Texas-based airline in bankruptcy court, saying AMR was required to pay the make-whole amount under the terms of existing notes.

The case is in re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The appeal is U.S. Bank Trust NA v. AMR Corp., 13-1204, U.S. Court of Appeals for the Second Circuit (Manhattan).

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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