Regional News

American/JFK Bond Settlement Before Judge Next Month

CHICAGO – A settlement agreement between American Airlines Inc. and holders of its $1.4 billion of New York City airport debt that paves the way for the airline to assume its leases at John F. Kennedy International Airport is up for a hearing next week in bankruptcy court.

The hearing is set for April 3rd before Judge Sean H. Lane who presides in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan. The deadline for filing objections is Wednesday.

A majority of bondholders have endorsed the terms initially reached and then revised between the airline and trustee Bank of New York Mellon late last year. The conduit bond issuer – the New York City Industrial Development Agency – also participated in negotiations.

Under the settlement, American assumes its leases 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 pursued could have reduced the bonds to unsecured status.

That means holders of $1.25 billion of 2002 and 2005 bonds will 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 an additional payout of about $10 million from interest payments due to the 2002 holders and from reserves on the 2002 and 2005 bonds. The agreement calls for the trustee fees to be paid from reserves, the diverted 2002 interest payments, and a debtor contribution of $707,000, according to a trustee notice.

While unsecured claimants in many bankruptcies fail to recoup much of their investment, investors have assigned full value to American’s unsecured bonds since the announcement last month that American will merge with U.S. Airways Group. American’s unsecured and secured municipal bonds have traded at full value and in many cases at a premium since the announcement.

Through the settlement, American benefits 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.

American lays out its position in support of the terms. The settlement “allows the debtors to fully resolve all material issues related to the bonds, confers substantial value upon their estates, and enables the parties to avoid potential litigation and associated legal costs,” it reads. “The subleases are important to the debtors’ business operations and preserve and enhance the value of the debtors’ estates….continued access to the JFK premises is important to the debtors’ ongoing operations and essential to maintaining the debtors’ comprehensive route network, which constitutes the lifeblood of their operations.”

The airline and parent, Fort Worth, Texas-based AMR Corp., filed for Chapter 11 on Nov. 29, 2011 with about $3.3 billion of mostly tax-exempt special facilities revenue bonds issued to fund projects at its hub airports, maintenance bases and other facilities, or to refund debt. About $1.5 billion was lumped into the unsecured category, meaning the debt was not secured by an asset or lease, and carried only an airline guaranty of repayment. The other $1.8 billion of bonds was secured by some form of collateral or asset, such as a lease or leasehold mortgage interest. American continued to make good on those payments during its bankruptcy while hedging its position by leaving open the option for a future challenge to the status of its leases.

The 2002 and 2005 JFK bonds which financed the airline’s new Terminal 8 at JFK and the demolition of two terminals were considered secured as they were backed by a mortgage on American’s leasehold interest in Terminal 8.

The status of the airline’s 1990 and 1994 bonds was more clouded and market participants had lumped them into the category of unsecured. They are backed only by payments under a lease agreement and they had been trading at 70 cents to 80 cents until the settlement’s announcement late last year.

The merger agreement announced last month between American and U.S. Airways calls for creditors of unsecured claims to which both American and parent AMR are obligors — the case for much of American’s municipal debt — to receive shares of mandatorily convertible preferred stock equal to the full amount of their claims.

While the market has assigned full value to the unsecured bonds, the merger still must clear the bankruptcy court and federal regulators and the market will ultimately determine the company’s real value when trading opens on the new company’s stock. The proposed order notes that American has substantial liquidity of $4 billion to meet its obligations. Seabury Advisors served as advisor to the trustee and will be paid $1 million by American.




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