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American's Bankruptcy Confirmation Plan on Hold

CHICAGO — The federal judge overseeing American Airlines' Chapter 11 bankruptcy put confirmation of the carrier's restructuring plan on hold Thursday due to the federal government's move earlier this week to block its merger with US Airways Group Inc.

Lawyers for American and its parent AMR Corp. argued during the hearing that the court could still approve the plan even though it would not become effective with the lawsuit pending.

U.S. Bankruptcy Court Judge Sean Lane for the Southern District of New York asked lawyers for American and others parties in the case to submit briefs by the end of next week weighing in on whether the plan can be confirmed with the challenge pending. The next court date is a routine monthly hearing scheduled for Aug. 29.

The confirmation hearing had been set prior to the surprise move earlier this week by the U.S. Department to sue to block the merger over antitrust concerns. The two airlines have vowed to vigorously fight the lawsuit and pursue all legal options.

"While we await the court's decision on our Plan of Reorganization, we will continue to proceed with the legal process to challenge the DOJ complaint in federal court. As we continue to build an airline that is profitable and successful, we will continue planning for our proposed merger with US Airways with teams of talented people committed to the long-term success of the new American," American spokesman Michael Trevino said in statement after the hearing.

The municipal market is watching closely as the merger is central to American's restructuring plan which would provide unsecured creditors, including bondholders, a full recovery. About $1.5 billion of the airline's $3.3 billion of tax-exempt revenue bonds issued for projects at its various airport facilities falls into the category of unsecured claims, meaning they are not backed by any special collateral besides an airline repayment pledge.

High-yield buyers scooped up the bonds at steep discounts just prior to and after the Chapter 11 filing in November 2011. The bonds have traded at full value to a premium since early this year when the proposed merger was announced and American said even equity holders would see some payout under its restructuring.

Equity holders follow unsecured bondholders in the chain of priority claims in bankruptcy so that signaled bondholders would be made whole and immediately drove up the bonds' value. Many market participants following the case believe unsecured creditors won't fare so well if the merger is scraped and American is forced to re-tool its plan and emerge from bankruptcy on its own. In earlier airline bankruptcies many unsecured bondholders saw recoveries of between 20 cents to 60 cents.

Trades posted of American's unsecured municipal bonds show a loss of value since the U.S. Justice Department's announcement of its civil anti-trust lawsuit Tuesday, but prices have remained in the mid high 80s to 90s.

Bonds from a $209 million 1999 Dallas-Fort Worth International Airport Facilities issue due in 2035 traded at 105 cents to 108 cents on the dollar last week. They have traded at 85 cents to 88 cents on the dollar since the announcement.

A 2007 issue of Alliance Airport special facilities refunding bonds for $207 million due in 2029 traded at 111 cents on the dollar prior to the announcement and has since dropped to 92 cents to 93 cents on the dollar.

Interactive Data Corp. said it saw one Alliance Airport bond trade Wednesday for 91.5 cents on the dollar. Unsecured AMR bonds traded as low as 16 cents on the dollar after the bankruptcy filing while secured bonds traded at between 75 cents to 77 cents on the dollar, Interactive Data reported at the time. Unsecured bonds just prior to the bankruptcy filing had traded in the 40 cents range.

Analysts have offered mixed assessments of the government's actions, with some saying the lawsuit's strong language reflects and intent to kill the deal. Others believe the deal could be salvaged through a settlement that involves airline concessions such as the forfeit of some routes.

Justice joined with the attorneys general from six states and the District of Columbia in the complaint alleging the merger would undercut competition and hurt consumers. The reduction in the number of major domestic airlines "threatens substantial harm to consumers," the complaint charges. The merger, central to the reorganization plan, would create the nation's largest airline, ahead of United Airlines and Delta Air Lines.

The effective date for the reorganization plan and American's exit from Chapter 11 was expected to coincide with the closing of the merger in an $11 billion all-stock deal with hearing Thursday considered one of the final hurdles.

The eventual outcome also stands to impact the municipal airport sector. Fitch Ratings said in a special report the lawsuit would not have a short-term impact on its airport ratings. "In Fitch's opinion, absent the merger, American will remain at a competitive disadvantage to its larger rivals as a smaller standalone entity without the benefits of a combined route structure," the report read.

"The central risk for the American hubs would be a major loss in connecting traffic, exacerbating the debt burden and airline cost profile since all three hubs have in place or will be facing high leverage metrics driven by large capital programs," Fitch said. American operates hubs at Dallas-Fort Worth International Airport, O'Hare International Airport, and Miami International Airport.

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