Bankruptcy Court Judge to Rule This Week on American's Merger and Chapter 11 Exit

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CHICAGO – A U.S. Bankruptcy Court judge said Monday he expects to rule by Wednesday on American Airlines’ request for final clearance to merge with US Airways Group Inc. and exit Chapter 11, after the airlines settled a federal antitrust challenge.

Holders of American’s $3.3 billion of municipal bonds favor the plan because it makes them whole. Prices on American’s unsecured bonds, once in the 20 cents on the dollar range, are now trading at full value to a premium.

American asked U.S. Bankruptcy Court Judge Sean Lane during a Monday hearing in his Manhattan courtroom to approve the settlement with the Department of Justice, paving the way for the merger and American’s exit from bankruptcy.

American argued that details of the settlement with federal regulators did not materially alter its reorganization plan confirmed by Lane in September. Approval would mean the airlines do not need to seek creditor or stockholder votes on the modifications to the reorganization plan.

Lane also heard arguments from lawyers representing a private group of about 40 citizens who have filed a separate antitrust lawsuit. The group is seeking a temporary restraining order against the merger.

Lawyers for the group argued the federal settlement does not fully address their concerns and they want their case litigated first. The lawsuit is considered the only hurdle to the court’s approval.

“The DOJ settlement is cosmetic, as debtors readily admitted. The debtors will not suffer any significant divestiture of assets, nor significant change of their business operations,” a recent filing from the group read.

Lane took the various arguments under advisement and said he expected to rule by Wednesday and possibly as soon as later Monday.

American is hoping to stick to a timetable that anticipates closing on its merger and exiting Chapter 11 next month. The carrier filed for Chapter 11 on Nov. 29, 2011.

American had been headed for a smooth bankruptcy exit with a reorganization plan embraced by its labor unions and unsecured creditors, including holders of its special facilities revenue bonds. That changed when the USDOJ moved to block the merger with US Airways with the filing of an antitrust lawsuit in August. Federal authorities along with attorneys general from a handful of states argued that the union would undercut competition and hurt consumers.

The airlines initially fought the charges, but in recent months moved toward settlement negotiations. In an agreement announced Nov. 12, the two airlines agreed to divest slots, gates, and ground facilities at seven airports across the county.

U.S. District Court Judge Colleen Kollar-Kotelly, who was handling the federal lawsuit, has approved the settlement agreement but the terms must be published and a comment period allowed. It is not expected to hold up the merger or American’s bankruptcy exit.

The $11 billion marriage is the centerpiece of American’s reorganization plan that calls for unsecured creditors to recoup their full investment with equity holders receiving some payout depending on the trading value of the new company.

The airline has continued making payments throughout the bankruptcy on its secured bonds. Trades on secured bonds backed by collateral or assets have mostly held steady.

Holders of American’s unsecured municipal bonds fall under the category of allowable claims. About $1.5 billion of the airline’s $3.3 billion of tax-exempt revenue bonds fall into the category of unsecured claims, meaning they are backed solely by the bankrupt airline’s 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. They have rallied and many are trading at a premium.

“As confirmed by the overwhelming votes in favor of the plan and the merger, the plan represents a remarkable, if not unprecedented, achievement, particularly in an airline Chapter 11 case,” American noted. Past airline bankruptcies resulted in payouts of between 20 cents and 60 cents for unsecured holders and some airlines challenged, with mixed results, the lease status on secured bonds.

While bondholders are eagerly anticipating the merger, it could have a mixed impact on the airport sector as airports large and small may see some negative credit effects, Moody’s Investors Service warned in a recent report. The greatest risks are posed to smaller airports reliant on the airlines for flights.

Also this month, congressional committee leaders sent a letter to Attorney General Eric Holder expressing concerns the settlement agreement might hurt less populated and rural areas.

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