US Airways-AMR Merger Produces Bondholder Windfall: Muni CreditMichelle Kaske
Investors in $3.4 billion of municipal debt backed by American Airlines parent AMR Corp. are enjoying a windfall as the bankrupt company’s merger with US Airways Group Inc. creates the world’s largest carrier.
AMR munis sold for airport construction in cities from Los Angeles to New York and repaid by its revenue have gained as much as 487 percent since the company filed for bankruptcy protection in November 2011, with prices on some reaching historic highs. The merger will help strengthen American’s operations and make it more competitive, said John Miller, co-head of fixed-income at Nuveen Asset Management LLC.
In one example, AMR-backed muni securities sold for Fort Worth Alliance Airport in Texas, which serves cargo and corporate flights, reached 105 cents on the dollar yesterday, the highest since their 2007 offer and up from 17.88 cents on Nov. 30, 2011. The bonds, due in 2029, are among $1.9 billion of AMR munis that would convert to equity in the deal, Miller said.
“They will have the strongest overall network of any airline in the U.S.,” Miller, who helps manage $86.5 billion of munis, including $400 million of AMR debt, said from Chicago. “They have operated well in bankruptcy and they could perhaps operate even better upon the emergence and the combination of the two companies.”
Investors have bought AMR munis, which are in default and rated speculative grade, as they search for extra yield with interest rates in the $3.7 trillion local market close to a 47-year low. AMR bonds are helping high-yield airline muni debt earn about 1.1 percent in 2013, beating the 0.9 percent gain for all high-yield munis, according to Barclays Plc.
The two airlines yesterday announced an $11 billion agreement to combine, retain all airport hubs and expand service. The companies expect the transaction to close in the third quarter. The combined airline would still face competition from United Continental Holdings Inc. and Delta Air Lines Inc., which would have stronger and more balanced route networks, Standard & Poor’s said in a report yesterday.
Nuveen is part of a committee of creditors participating in repayment negotiations, Miller said. Muni bonds account for more than 11 percent of the $29.6 billion of debt of Fort Worth, Texas-based AMR. US Airways is based in Tempe, Arizona.
“American Airlines is somewhat unique in that an unusually high percentage of their debt is muni debt,” Miller said. More so than in prior airline bankruptcy agreements, “municipal bonds were actually an important driver,” he said.
Creditors such as corporate-bond investors, muni holders and unions have agreed to the debt negotiation, according to Miller.
“You’re going into this approval process with all of the key stakeholders saying, ‘Yes, I can sign up for this,’” Miller said. “So that is giving greater clarity to what the traders think the bonds might be worth.”
While AMR has pledged to repay the debt, some bonds have additional security through lease payments American makes on airport gates. Even if American abandons those gates, the bonds may still be repaid by renting the facilities to other carriers.
AMR debt sold for John F. Kennedy International Airport and Los Angeles International Airport has such an additional security. The Fort Worth Alliance bonds, and AMR debt sold for Dallas-Fort Worth International, American’s biggest hub, don’t.
Securities without the additional pledge saw steeper declines after the bankruptcy filing, said Chris Fornal, a muni transportation-credit analyst at New-York based BlackRock Inc. The company oversees about $109 billion of munis, including AMR debt.
The secured AMR debt may still have room to gain, said Michael Walls, who manages $2.6 billion of high-yield munis, including AMR debt, at Waddell & Reed Financial Inc., which is based in Overland Park, Kansas. His firm holds $15 million of AMR bonds sold for JFK airport, after Walls bought $3 million worth following the filing.
“You may see a little bit of marginal rally because it’s now cleared up and you would consider it a performing bond,” meaning that investors will receive interest and principal, Walls said about secured AMR debt.
JFK bonds maturing in August 2016 traded as high as 112 cents on the dollar yesterday, up from 88.25 cents on Nov. 30, 2011, data compiled by Bloomberg show.
The merger will generate yearly savings and new revenue of more than $1 billion by 2015, the airlines said. Of more than 900 routes, only 12 have overlap between the carriers, US Airways Chief Executive Officer Doug Parker, who will run the new company, said in an interview.
“We are going to need to keep all the hubs in place,” Parker said.
In trading yesterday, benchmark 30-year muni yields rose to 2.96 percent, the highest since September, Bloomberg Valuation data show.
Following is a pending sale:
NEW YORK CITY plans to borrow $1.4 billion of general-obligation bonds as soon as Feb. 25, according to the Office of Management and Budget. Proceeds will finance capital projects, refund debt and refinance variable-rate bonds into a fixed interest rate. (Added Feb. 14)