Buy Side

Settlement Advances on American Airlines JFK Bonds

CHICAGO — The trustee for bankrupt American Airlines Inc.'s $1.4 billion of New York City airport debt is aiming to submit a final settlement agreement to the court by the end of the month after a majority of bondholders endorsed proposed terms.

The proposed settlement reached between the airline and the trustee Bank of New York Mellon was distributed to bondholders late last year.

The trustee has received direction from a majority of each series of bonds from issues in 1990, 1994, 2002, and 2005 to proceed with final settlement negotiations with American and the bond issuer, the New York City Industrial Development Agency.

As part of negotiations, the trustee agreed to extend the deadline by which American was required to assume or reject its leases at John F. Kennedy International Airport to Feb. 27, tied to repayment of the debt. The airline had faced a Dec. 20 deadline.

Nearly 71% of 1990 holders, 80% of 1994 holders, 75% of 2002A holders, 98% of 2002B holders, and 73% of 2005 holders directed BNY Mellon to advance the settlement after a review of the proposed terms. A 51% approval rate in each series was needed.

"The trustee will attempt to finalize and negotiate the Stipulation and Agreement within the next few weeks so that a motion seeking approval …can be filed with the Bankruptcy Court and be heard at the hearing scheduled for February 26, 2013," read a recent trustee notice.

The trustee cautioned that there's no assurance a final agreement will be reached and approved by the court.

Resolution of the status of more than $1.4 billion of the airline's $3.2 billion of mostly tax-exempt special facilities revenue bonds would significantly advance its efforts to deal with its tax-exempt debt and move closer to exiting Chapter 11.

The proposed settlement offers a mixed bag for investors depending on their holdings. Holders of $1.25 billion of 2002 and 2005 bonds would fully recoup their investment. Holders of $84 million from a 1990 issue and $83 million from a 1994 sale would receive an unsecured claim and a small additional payout of roughly 11 cents and 6 cents on the dollar, respectively.

"In our opinion, this could be a satisfactory outcome for the 2002 and 2005 bonds, but we are not sure that the interests of the 1990 and 1994 bondholders will have been justly served," read a December commentary from Bank of America Merrill Lynch Global Research.

American benefits in the settlement by securing its position at a key hub and avoiding a bondholder attempt to accelerate repayment. Bondholders avoid what could be a costly and potential lengthy legal battle over American's obligation to repay bonds and their value.

The airline and parent, Fort Worth, Texas-based AMR Corp., filed for Chapter 11 on Nov. 29, 2011 in the U.S. Bankruptcy Court for the Southern District of New York.

The airline's debt included $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 is highly speculative.

While American's management has pursued a reorganization plan as a stand-alone company, it has been pressed by some creditors, including its revenue bondholders, to merge with US Airways Group and published reports have suggested that a deal could soon be reached.

American's other $1.7 billion of debt was secured by some form of collateral or asset, such as a direct lease, a leasehold mortgage interest, or sublease. The airline must assume or reject its leases during bankruptcy and make good on those obligations it assumes.

The airline's 2002 and 2005 New York bonds financed the airline's new Terminal 8 at JFK and the demolition of two terminals. The bonds, which mature in 2031, carry guarantees by American and AMR and are secured by a mortgage on American's leasehold interest in Terminal 8.

Analysts and bankruptcy lawyers have generally characterized the 2002 and 2005 bonds as secured and believed American would assume its leases there as its operations at Kennedy are crucial to its business plan.

The status of the airline's 1990 and 1994 bonds have always been more clouded. They are secured only by payments under a lease agreement. The 2002 and 2005 bonds have traded at full value while the 1990 and 1994 bonds traded at 70 cents to 80 cents until the settlement's announcement and more recently have risen to 90 cents on the dollar.

Under terms of the settlement, American assumes its lease tied to the 2002 and 2005 bonds, and continues to make scheduled rental payments. It also waives the right to seek to recharacterize the lease as a financing or loan, which if successfully challenged could have reduced the value of the bonds to unsecured status.

The 2002 and 2005 bondholders will receive full payment although some will forgo $8.5 million in interest which would be distributed to the 1990/1994 holders. Another $3.5 million will be drawn from reserves with $2 million going to 1990-1994 bondholders and $1.5 million to cover trustee expenses.

Under the proposed terms, the 1990 and 1994 holders would have to agree that their transactions were unsecured financings. In addition to eventually receiving an unsecured claim payout, holders would receive an additional $10 million distribution.

American notified the trustee of its intention last year to seek to re-characterize the 1990 lease agreement as a disguised financing. While it continues to use facilities tied to the 1990 lease, American does not believe it's using any facilities under its 1994 lease agreement and so it informed the trustee that it would likely reject the lease. Such a move could trigger a bankruptcy rule sharply limiting claims.

BNY Mellon disputed many of American's assertions as to the status and value of the 1990 and 1994 bonds, but without a settlement it appeared that a lengthy and possibly costly legal battle could ensue, so it believes the proposed settlement offers the best overall resolution.



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