CHICAGO — American Airlines Inc. and the trustee on $237 million of revenue bonds issued for the carrier’s Tulsa maintenance base will ask the bankruptcy court to approve an agreement Wednesday paving the way for the bond trustee to resume debt service payments.
The potential challenge had prompted the trustee — the Bank of New York Mellon — to withhold debt-service payments owed after the airline’s November Chapter 11 filing, even though American remained current on all its payments.
“It should return to business as usual,” one of the lawyers representing a party in the case said of the settlement agreement that will be presented to Judge Sean H. Lane on Wednesday. Lane presides in the U.S. Bankruptcy Court for the Southern District of New York, where American’s parent, Fort Worth-based AMR Corp., filed its Chapter 11 case on Nov. 29.
American’s unsecured creditors committee supports the agreement but one objection has been filed.
If approved, the pact would take effect early next month and distributions of debt service owed since the bankruptcy filing could be distributed this fall. BNY Mellon is the lead trustee and Bank of Oklahoma serves a co-trustee.
The tax-exempt debt is tied to American’s fleet maintenance base at Tulsa International Airport and was issued through the trustees of the Tulsa Municipal Airport Trust. A total of $450 million was issued but about $215 million is held by the airline from 2000 and 2001 issues.
Another $237 million is held by investors. It includes a 1992 issue for $27.5 million, a 1995 series for $97.7 million and a 2000 series for $112.4 million. American makes lease payments to cover debt service and for ground rental use on a monthly basis, with debt payments made on Dec. 1 and June 1. AMR guarantees the bonds, which are also secured by the bond sublease being assumed.
American carried $3.2 billion of special facilities revenue bonds with it into bankruptcy. Proceeds had funded projects at its hub airports, maintenance bases, and other facilities or refunded debt.
The airline’s debt included between $1.4 billion and $1.5 billion of so-called unsecured obligations, meaning they are not backed by an asset or lease, and carried only an airline guaranty of repayment. The worth of those bonds depends on the airline’s reorganization plan, and the recovery rate could range from pennies on the dollar to double-digit amounts.
The other $1.7 billion to $1.8 billion of debt, including the Tulsa bonds, was secured by some form of collateral or asset, such as a direct lease, a leasehold mortgage interest, or a sublease. The strength of the pledge varies based on the terms of the individual deals.
While American continued to make its payments on the Tulsa bonds after the bankruptcy filing, the payments were accompanied with a caveat reserving the airline’s right to challenge the legality of the sublease and bond payments under bankruptcy rules. “American does not waive (and expressly reserves) its right to seek to re-characterize any or a portion of the obligations under the sublease and any related documents,” American said in previous filings.
The re-characterization is significant in that airlines in past bankruptcies — beginning with United Airlines in 2002 — have sought to shed or reduce their debt obligations by arguing that the terms of the subleases too closely resemble those of a loan or financing arrangement.
Court rulings have varied. Subleases upheld as a true lease must either be assumed or rejected, and if assumed, bond payments must be made. Subleases deemed to be financing arrangements are lumped into the category of an unsecured claim with much less value.
The uncertainty over whether American might eventually challenge the bond sublease structure prompted the trustee to withhold distribution of debt service. The trustee took the position that without clarity on the re-characterization issue it was unsure how to allocate principal and interest payments to bondholders based on the bond indenture rules.
Late last year, the trustee issued a notice that AMR was in default of its guarantee, taking the first steps that could have led to an acceleration of debt payments and additional interest costs for American.
Facing a summer deadline on the assumption or rejection of the sublease, the airline filed a motion seeking to assume the sublease but again sought to reserve its right to eventually challenge its status.
The trustee opposed the ongoing uncertainty and negotiations began with the current agreement that was struck last month with the support of a majority of bondholders, according to court filings. Under the final settlement posted in a notice Aug. 8 with an Aug. 15 deadline for objections, American assumes the sublease and waives its right to challenge the sublease’s status.
The airline’s default on its guaranty is cured so it no longer faces the threat of accelerated debt repayment or additional interest. The carrier also will provide $911,000 to cover fees and expenses incurred by the trustees and the Tulsa Municipal Airport Trust.
The agreement paves the way for the trustee to distribute the $28.5 million due on the 1992 bonds that matured last December. Debt service owed from last December and June on the other bonds will also be distributed.
“Assumption of the sublease on these terms provides the debtors with certainty regarding their continued operations at their critical Tulsa maintenance base and permits the debtors to focus on other issues in the Chapter 11 cases without the prospect of protracted and costly litigation,” the settlement documents filed with the court read. The agreement is also in the best interests of the trustees, bondholders and the Tulsa Trust because it provides “greater certainty… as to the amount of future payments under the sublease and will permit BNY Mellon to distribute to bondholders the funds that it has, thus far, been unable to distribute.”
The agreement does not cement an airline’s commitment to maintain the base, but it signals its important role in the business plan going forward as it attempts to cut costs, reorganize and emerge from bankruptcy. After the initial filing, some investors and analysts had worried over whether American would remain at the Tulsa base and had expressed concerns over the difficulty in re-letting the facility should the airline have surrendered it.
This past spring American Airlines bonds traded at 70 to 75 cents on the dollar but have been trading at full value more recently.
