AMR Bankruptcy Yields Record-Low Bond Coupon: Corporate Finance
American Airlines is selling investment-grade debt even as it spends a 15th month in bankruptcy while bond buyers look ahead to the merger with US Airways Group Inc. (LCC) that will create the world’s largest carrier.
The AMR Corp. (AAMRQ) unit issued $663 million of so-called enhanced equipment trust certificates yesterday that included a portion paying 4 percent, matching the record low coupon for similar airline debt, which was first awarded to United Continental Holdings Inc. in September, according to data compiled by Bloomberg. American is also seeking to refinance about $1.3 billion of bonds backed by aircraft after receiving court approval to do so in January.
Debt investors are wagering a heftier American will benefit from consolidation that will help the carrier restore profitability as it fills more seats and boosts fares. Airlines are also adding more efficient planes such as those securing the new American debt, helping to support the value of EETCs.
“This is an alignment of the stars that hasn’t been available to this company in years,” said Vicki Bryan, a senior bond analyst at Gimme Credit LLC, who upgraded AMR to “stable” from “deteriorating” last month. American’s bankruptcy is “already in the rearview mirror and people are willing to invest in the new company,” she said.
The airline won court approval Jan. 17 for $1.5 billion in aircraft financing, which the carrier said would save it more than $200 million in interest expense by exploiting lower interest rates. While U.S. Bankruptcy Judge Sean Lane overruled an objection from bondholders that American would owe a so- called make-whole premium, creditors have appealed the decision.
Make-whole provisions, under which investors receive a premium if the securities are redeemed early, are included in credit agreements to compensate lenders for missed interest payments while allowing issuers to call debt before maturity.
American plans to refinance $425 million of 10.375 percent securities maturing in 2019, $159 million of 13 percent debt due 2016 and $682 million of 8.625 percent bonds maturing 2021. The securities were issued before the company entered bankruptcy in November 2011 with assets of $24.7 billion and debt totaling $29.6 billion.
The notes are all trading above par to yield a weighted- average 8.74 percent, with the 13 percent securities rising to 104.6 cents on the dollar on March 6 from as low as 103.5 cents after the January court decision, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority.
American’s $460 million of 6.25 percent convertible notes due October 2014 that are in default rose today to 109.125 cents on the dollar at 2:01 p.m. in New York, the highest level in two years, Trace data show.
Its sale of EETCs yesterday was the first by an airline operating under Chapter 11 court supervision, Fitch Ratings said in a March 5 report. American issued $506.7 million of 4 percent notes due 2025 and $156.6 million of 5.625 percent securities maturing 2021, Bloomberg data show.
“The market is favorable,” Philip Baggaley, an analyst at Standard & Poor’s in New York, said in a telephone interview. “American in bankruptcy, but with a clear pathway to exiting bankruptcy and a better cost and capital structure, can finance at much better rates than American could before the bankruptcy, when its future was more uncertain.”
The carrier’s 4 percent coupon matches the then- unprecedented payment on United’s $712 million of securities due 2024 that are linked to aircraft including three Boeing Co. (BA) 787 Dreamliner jets. American’s new securities are expected to be backed by eight of its Boeing 737-823 aircraft and one Boeing 777-223ER plus four 777-323ER planes that will be delivered between April and July, the company said in a statement yesterday.
Boeing’s 737-800 model, a midsize narrow-body plane used by more than 100 airlines worldwide, is the company’s most popular aircraft, Baggaley wrote in a March 5 report.
“Given its wide user base and expected demand in excess of supply over the next couple of years, we consider it to be the best aircraft collateral currently available,” he said. American’s EETC issue yesterday is also the first to use the Boeing 777-300ER as collateral, he said.
S&P ranks the 4 percent, Class-A certificates BBB-, two steps below Fitch’s BBB+ grade, and has a B+ rating on the 5.625 percent, Class-B debt, a level above Fitch’s B ranking.
US Airways is rated B3 by Moody’s Investors Service and B- at S&P.
Airlines are poised to increase profits as larger carriers limit capacity, giving them greater power to raise fares and hold down costs. They’re also replacing older and less fuel efficient planes, with industry backlogs for the four largest manufacturers including Boeing and Airbus SAS at a record 9,533 at the end of 2012, Bloomberg data show.
That helps to make EETCs “compelling” for investors, whose claims are secured by collateral that can be resold worldwide, according to Sara Rouf, an analyst at Fitch.
“Unlike any other collateral, you can move a plane anywhere in the world, so if the market’s bad in the U.S. or North America, there are a lot of growing airlines in the rest of the world,” Rouf said in a telephone interview.
While investors probably won’t award American lower yields than the 4 percent coupon received yesterday as it refinances debt linked to older aircraft, the carrier is still poised to benefit as bond buyers anticipate its merger with US Airways, according to Roger King, an analyst at CreditSights Inc.
“It’ll have a much less levered balance sheet, and it’ll have a new CEO,” King, based in New York, said in a telephone interview. “People are very optimistic about it.”
The all-stock merger will create the world’s biggest carrier by passenger traffic, passing United. The combination, announced Feb. 14, will be considered by the judge overseeing American’s bankruptcy at a March 27 hearing in New York.
Charles A. Lindbergh flew a postal route in 1926 with a DH- 4 biplane for one of American’s forerunners, Robertson Aircraft Corp.
A pioneer of nonstop transcontinental service in the 1950s, American grew to become the world’s largest carrier in the 2000s. It lost that status when Delta Air Lines bought Northwest Airlines in 2008; United Airlines and Continental Airlines formed the largest carrier when they merged in 2010.
American sought court protection on Nov. 29, 2011, blaming labor costs it said exceeded competitors’ by as much as $800 million a year. It reached cost-cutting agreements with its unions and other workers during bankruptcy to reduce annual spending by $1.06 billion.
Doug Parker, the US Airways chief executive officer who will retain that role in the combined company, said during a Feb. 14 news conference to announce the merger that American would emerge from bankruptcy in the third quarter, the same time the deal between the carriers is set to close. The resulting business, to be named American Airlines Group Inc., will be owned 72 percent by American creditors and 28 percent by US Airways shareholders.
A weighted average coupon of 9.76 percent means the secured debt American seeks to refinance costs the company about $124 million a year, Bloomberg data show. Tapping the bond market may allow the carrier cut that interest expense by as much as half, Gimme Credit’s Bryan said.
“The company is already trading as if it’s become the new company it will be,” she said. “It bodes well for their entire refinancing.”