CHICAGO — Holders of bankrupt American Airlines Inc.'s New York City airport debt are weighing a settlement offer that would pave the way for the carrier to assume its lease at John F. Kennedy International Airport.
Resolution of the status and repayment of more than $1.4 billion of the airline's $3.2 billion of special facilities bonds would significantly advance its efforts to deal with its tax-exempt debt and move closer to exiting Chapter 11.
The settlement, first disclosed late last month by bond trustee Bank of New York Mellon and revised late last week, marks one of two significant developments involving the status of the airline's secured airport debt.
American has assumed its leases at Los Angeles International Airport, signaling that holders of its $254 million of bonds issued through the Regional Airports Improvements Corp. will receive full payment, according to a bondholder notice posted Monday.
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"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," said a commentary Monday from Bank of America Merrill Lynch Global Research.
Despite some reservations as to the differential treatment, the report authored by analyst Howard Sitzer concludes: "Considering prevailing tax exempt interest rates, the strong bid on higher yielding tax exempts, and existing prices for the various coupons … we believe that all of the bonds will benefit in the secondary market from the settlement."
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 with about $3.2 billion of mostly tax-exempt airport facility debt. Proceeds had funded projects at its hub airports, maintenance bases, and other facilities or refunded debt.
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. The market has so far placed a value of about 70 cents on the dollar for American's unsecured claims. American officials have said they hope to reorganize as a stand-alone company but a merger with US Airways Group is also on the table.
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 a sublease. The strength of the pledge varies based on the terms of the individual deals. The airline must assume or reject its leases during bankruptcy and make good on those obligations it assumes.
The airline's New York special facility revenue bonds issued in 2002 and 2005 through the New York City International Development Agency 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.
The airline's 1990 and 1994 bonds are secured only by payments under a lease agreement.
Market 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 2002 and 2005 bonds have traded at full value while the 1990 and 1994 bonds recently traded in the 70 cents to 80 cents on the dollar range.
Under terms of the settlement, American assumes its lease tied to the 2002 and 2005 bonds, continues to make scheduled rental payments, and waives the right to seek to recharacterize the lease as a financing or loan. 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 made its lease payments due last February and August that go toward repayment of the 2002 and 2005 bonds. The trustee withheld some of the funds from bondholders because the airline reserved its right during the course of its bankruptcy to ask the court to re-characterize its lease obligation. The aggressive tactic was first taken with mixed results by United Airlines during its bankruptcy a decade ago. The airline was able to shed some debt the market had considered secured by a lease obligation when the courts reclassified some United leases as special financings or loans based on their terms, bankruptcy law, and the application of local state lease and contract laws.
The fate of the 1990 and 1994 bonds has always been less clear, and American notified the trustee of its intention earlier this 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 seek to reject the lease, according to bondholder notices. Such a move, if successful, could trigger a bankruptcy rule sharply limiting claims.
BNYM disputes many of American's assertions as to the status and value of the 1990 and 1994 bonds, but without a settlement it appears from a review of court filings and bondholder notices that a lengthy and possibly costly legal battle could ensue to resolve the dispute.
The trustee reported that American lawyers in June offered to assume the 2002 and 2005 lease but at the expense of the 1990/1994 bondholders and without an overall settlement, American "threatened" to seek to re-characterize its 2002/2005 lease as a secured financing. Though the trustee believed it could prevail in a challenge to the 2002 and the 2005 bonds, it agreed to negotiations in an attempt to preserve some value on the 1990/1994 bonds and reduce litigation risks on the 2002 and 2005 bonds.
"During the course of these discussions, the trustee reached out to all large holders of each of the 1990, 1994 and 2002, 2005 bonds known to it to solicit their views on an acceptable range of settlement alternatives," the settlement notice reads. "The trustee believes that the proposed settlement …falls within the range of settlement that these bondholders would find acceptable."
To win approval, at least 51% of holders of each the 1990, 1994, 2002, and 2005 bonds must agree to the terms which include a provision indemnifying the trustee. American had faced a Dec. 20 deadline to assume or reject its JFK leases, but the trustee said it expects that deadline to be extended as it awaits bondholder direction and additional negotiations on various terms.
Holders of the LAX bonds can breathe easier as the bankruptcy court recently approved American's assumption of its lease there after a year of negotiations with American and the city.
"These negotiations were at times difficult and included threats by the debtors that they would move to reject the sublease if the trustee did not make significant concessions with respect to the debtors' obligations under the sublease and their guarantees of the bonds," according to a bondholder notice from trustee BNY Mellon.
The 2002 facility sublease revenue bonds were sold for the Terminal 4 project at LAX. American has been making rental payments but, as with the JFK bonds, reserved its right to ask the courts to recharacterize its lease obligations. Therefore the trustee withheld payments to holders as it did with the JFK debt. American writes in its motion that maintaining its strong position at LAX is "integral" to its business plan.
In its motion to assume the lease, American waives its right to seek to recharacterize its sublease. No appeals were filed to the motion prior to a Dec. 14 deadline and the court order is now final, according to a trustee notice posted Monday.
The order paves the way for full repayment without additional interest on overdue interest payments. The trustee expects to begin making distributions of some American rental payments in hand next month, according to
