CHICAGO US Airways Group Inc. and bankrupt American Airlines
The proposed settlement announced Tuesday requires that American and US Airways Group divest slots, gates, and ground facilities at seven airports across the county, handing them over competing carriers including JetBlue Airways Corp. and Southwest Airlines.
A trial date had been approaching later this month in the antitrust lawsuit. If approved by the federal district court, the settlement will resolve the government’s “competitive concerns and the lawsuit,” a statement from the Justice Department read.
Closing on the merger is still also subject to the bankruptcy court’s approval of the settlement terms and other conditions, but the airlines said they hope to complete it next month. The timing of the merger had been set to coincide with American’s emergence from Chapter 11.
The settlement provides welcome news to American’s $3.3 billion of municipal bondholders, especially for those holding unsecured paper, as American’s Chapter 11 reorganization makes unsecured investors whole.
Interactive Data Corp. said it had not seen many trades of American’s municipals Tuesday, but did observe that “the bid side has clearly improved,” Jon Barasch, director of municipal evaluations, said in an email.
High-yield investors who scooped the debt up at deeply discounted rates in November 2011 after American filed for Chapter 11 protection stand to reap substantial gains. Clearance for the merger also provides more clarity for the airport sector going forward although it could strain some airport credits in the future as the two airlines merge their operations and tinker with flights and routes.
U.S. Bankruptcy Court Judge Sean H. Lane in September confirmed American’s reorganization plan, but the carrier’s exit hinged on resolution of the federal government’s antitrust challenge to the $11 billion, all-stock merger deal.
The government filed the lawsuit along with a handful of state attorney general to block the merger on Aug. 13. The challenge argued that the merger would hurt competition and drive up consumer fares.
Municipal market participants tracked the challenge closely as the merger is central to American's bankruptcy exit 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. The bonds had been trading at full value after the merger plans were announced early this year but had taken a hit afterward.
“This is an important day for our customers, our people and our financial stakeholders. This agreement allows us to take the final steps in creating the new American Airline,” AMR president Tom Horton said in a statement. Horton will serve as chairman of the board of the combined company.
“This agreement has the potential to shift the landscape of the airline industry,” Attorney General Eric Holder said in a statement. “The department’s ultimate goal has remained steadfast throughout this process - to ensure vigorous competition in airline travel. This is vital to millions of consumers who will benefit from both more competitive prices and enhanced travel options.”
American’s parent, Fort Worth-based AMR Corp., needs to return to the bankruptcy court to win approval for any amendments to its business plan as a result of the settlement. If the airlines had been unable to settle the challenge, American could have been forced to start from scratch on a reorganization plan with the recovery rates for bondholders uncertain.
The airline initially resisted overtures to merge with Tempe, Ariz. based US Airways after it entered Chapter 11 but faced pressure from creditors who believed it offered the best recovery rates. The bankruptcy case is being heard in the federal bankruptcy court in Manhattan while the government’s complaint was being heard in the U.S. District Court for the District of Columbia.
Under terms of the settlement, the airlines will divest slots at Washington Reagan National Airport and New York LaGuardia Airport, as well as certain gates and related facilities to support service at those airports. The airlines also will divest two gates and related support facilities at Boston Logan International Airport, Chicago O'Hare International Airport, Dallas Love Field, Los Angeles International Airport, and Miami International Airport, the airlines said in a statement. Despite the concessions, they still expect to generate more than $1 billion in savings beginning in 2015 as part of the merger.
In the settlement agreement, the new American agreed to maintain its hubs in Charlotte, New York’s Kennedy International Airport, Los Angeles, Miami, Chicago, Philadelphia, and Phoenix consistent with historical operations for a period of three years.
For a period of five years, the merged airlines agreed to continue to provide daily scheduled service from one or more of its hubs to airports in states that had joined in the lawsuit although some exceptions may be allowed. A previous settlement agreement with the state of Texas will be amended to make it consistent with the Justice settlement.
The settlement also prohibits the merged company from reacquiring an ownership interest in the divested slots or gates during the term of the settlement, according to Justice.
After the merger was first announced early this year, American bonds had traded at full value to a premium, 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. In earlier airline bankruptcies many unsecured bondholders saw recoveries of between 20 cents to 60 cents.
Trades posted of American's unsecured municipal bonds after the antitrust lawsuit was filing showed a drop in value to the mid high 80s to 90s and they bounced around since. They were buoyed by reports in recent weeks that the airlines and Justice were attempting to settle the case.
Airport sector analysts and participants also have watched the case closely as the eventual outcome stands to impact some airports’ credit quality. The merger stands to impact all airports, but several large US Airways hubs are most at risk for change in the event the merger occurred, Wells Fargo Securities LLC said in a September municipal commentary.
Smaller hub airports could have come out ahead if the proposed union had fallen apart, but overall airport credit quality benefits from a strengthened airline industry, the report from Wells Fargo municipal securities research concluded. A quick resolution of the merger dispute is in the best interests of the sector as the uncertainty makes capital planning by airports all the more difficult, wrote Wells Fargo senior analyst Randy Gerardes.
The DOJ challenge surprised many after federal regulators approved several recent mergers. In 2000, the department did oppose United Airlines’ proposed takeover of US Airways and in 2006 opposed Delta Air Lines merger with US Airways, but since then it has approved the United/Continental union, the Delta/Northwest Airlines marriage, US Airways’ takeover of America West, and Southwest Airlines’ acquisition of Air Tran.
Wells Fargo analysts believes US Airways’ large hub airports of Phoenix Sky Harbor International and Philadelphia International Airport are at the most heightened risk of eventual de-hubbing.
US Airways also operates a large hub at Charlotte Douglas International Airport. American’s large hubs are located at Dallas-Fort Worth International Airport and Miami International Airport. American operates smaller hubs at Chicago’s O’Hare International Airport and New York City’s John F. Kennedy International Airport.
Citing data from Interactive Data, the report suggested there had not been any significant widening of spreads on airport credits most at risk since the DOJ lawsuit was filed.
