Airlines Climb in Relative Value With New American: Muni CreditMichelle Kaske
Municipal debt backed by American Airlines’ parent has gained more than 500 percent in two years, rewarding investors who withstood AMR Corp.’s bankruptcy filing and a failed suit to block a merger that would create the world’s biggest carrier.
Munis backed by airlines and sold to finance facilities such as gates, and debt issued to pay for airports’ own projects are benefiting as an expanding U.S. economy spurs travel spending, said Vikram Rai, a strategist at Citigroup Inc. Airport muni debt is having its best rally since the start of 2012, Bank of America Merrill Lynch data show.
Some American Airlines securities are trading at record highs after reaching as low as 18.9 cents on the dollar two years ago after AMR’s filing, data compiled by Bloomberg show. A U.S. bankruptcy judge last week approved a merger with US Airways Group Inc. that may boost the debt even more, said Dan Loughran, a portfolio manager in New York with OppenheimerFunds Inc.
“It does remove the final hurdle,” said Loughran, whose company oversees $29 billion of munis, including AMR debt. “You just have an airline going forward that is likely to be more profitable given the fact that they’ve consolidated.”
About $3.4 billion of munis backed by revenue from AMR and American helped finance terminal expansions and upgrades in cities from Los Angeles to New York. The securities fluctuated in price because of the bankruptcy filing and after the Justice Department’s August motion to halt the merger. The carriers settled the agency’s antitrust claims last month, clearing the way for AMR’s bankruptcy judge to approve its plan to exit bankruptcy through the merger.
Bonds sold in 2007 to support construction at Chicago’s O’Hare International Airport, backed by American Airlines revenue and maturing in December 2030, traded Nov. 20 at an average price of 114.1 cents on the dollar, Bloomberg data show. That was the highest ever and up from 18.9 cents on Nov. 30, 2011, the day after the airline filed for court protection.
“These are very high-risk, high-reward bonds,” New York-based Rai, the Citigroup strategist, said in an interview. “That’s a lot of volatility.”
An improving economy may help debt backed by specific carriers as well as munis sold for airport construction and repaid with facility revenue such as passenger fees and leases, Rai said. Gross domestic product in the U.S. may grow 2.6 percent in 2014 and 3 percent the next year, according to median estimates from a Bloomberg survey of 74 analysts.
“The airport bonds could still get a slight uplift from positive headlines because with increased economic activity, passenger traffic increases and it benefits airlines,” Rai said. “And airports will also benefit from that.”
Airport bonds account for about $150 billion of the $3.7 trillion municipal market, Rai said in a Nov. 21 report. The Port Authority of New York and New Jersey is the biggest issuer, with more than $18 billion of debt for projects at New York-area airports.
Chicago O’Hare has $9.3 billion of obligations tied to its facility and Miami International has $7.1 billion.
Airport debt has benefited in the past few months from gains in the broader muni market after benchmark yields set a 29-month high in September, Loughran said.
Airport munis earned about 3.6 percent in the three months through November, the most since the start of 2012, Bank of America data show. The securities have still lost 2 percent this year, beating the 2.5 percent decline for the entire market.
While investors have pulled a record amount of cash from U.S. muni mutual funds this year, a reversal of that trend would help airport bonds perform even better, Rai said. Funds focused on longer-maturity bonds or high-yield munis, which include airport debt, have had the biggest withdrawals.
“Airport bonds unfortunately meet the criteria of high-yield as well as long-term, so they got whacked from both sides,” Rai said. “These two categories of funds were impacted the most by these outflows, so when that reversal happens, they’ll benefit the most as well.”
Investors have yanked about $50 billion from U.S. muni mutual funds this year, after adding about $43 billion in the same period last year, Lipper US Fund Flows data show.
Elsewhere in the municipal market, issuers from California to New York have scheduled about $15 billion of offerings in the next 30 days, the most since July, Bloomberg data show.
The governments are borrowing with yields close to a two-month high. Top-rated 10-year munis yield 2.84 percent, compared with 2.8 percent on similar-maturity Treasuries.
The ratio of the interest rates, a measure of relative value, is about 101 percent, and compares with a five-year average of about 102 percent. The lower the figure, the more costly munis are relative to federal securities.
Following is a pending sale:
New York state’s Utility Debt Securitization Authority plans to sell $2.1 billion of revenue bonds as soon as next week, data compiled by Bloomberg show. Proceeds will refund a portion of the Long Island Power Authority’s $7 billion of debt. The deal includes $485 million of taxable bonds.