Market Assigns Full Value to Bankrupt AMR's Unsecured Bonds

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CHICAGO — Municipal buyers gave their blessing to US Airways Group Inc.’s marriage with bankrupt AMR Corp. by ascribing near to full value to AMR subsidiary American Airlines’ unsecured tax-exempt debt traded Thursday, the day the deal was formally announced.

The airline has about $1.5 billion of unsecured municipal bonds. “The bonds are all up,” said Jon Barasch, director, municipal evaluations at Interactive Data, after reviewing trading activity on a series of CUSIPs.

“Trading levels strongly indicate that the belief is there will be a full recovery at par for unsecured bondholders,” said one high-yield investment specialist.

The bondholders who stand to reap the most are those who gambled and bought American’s unsecured bonds immediately after the bankruptcy filing on Nov. 29, 2011, when they tanked. Unsecured AMR bonds traded as low as 16 cents on the dollar after the filing while secured bonds traded at between 75 cents to 77 cents on the dollar, Interactive Data reported at the time. Unsecured bonds just prior to the bankruptcy filing had traded in the 40 cents range.

A range of industry analysts issued dire warnings at the time of potentially poor recovery rates as low as single-digit percentages. The recovery rate for unsecured holders had American emerged from federal Chapter 11 independently, as originally intended, is unknown. US Airways emerged early in the bankruptcy as an aggressive suitor. The bonds began rising in value in 2012 trading activity and continued their upward climb.

The airline entered bankruptcy with about $3.3 billion of municipal debt 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.

American ultimately did not challenge its leases tied to its secured bonds and a settlement is pending before the court on its New York City airport debt. What had remained uncertain was how much unsecured bondholders would recoup.

The agreement announced Thursday by the airlines 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. AMR’s creditors will own 72% of equity with US Airways shareholders receiving 28%.

The market was digesting details of the agreement and noted that many hurdles remain ahead of any payout. The bankruptcy court must sign off as well as federal regulators, and the market will ultimately determine the company’s real value.

The anticipated American recovery rate far exceeds what unsecured bondholders received in United Airlines’ 2002 bankruptcy and Delta Air Lines’ 2005 bankruptcy. In those cases, United bondholders receive a payout valued in the 20 cents range while Delta bondholders saw a payout valued at 45 to 50 cents.

Hedge funds were quickly drawn to unsecured bonds after the bankruptcy filing, scooping them up at rock-bottom prices, several high-yield market specialists said.

American entered bankruptcy with more cash in the bank than previous airlines filing to reorganize and did not require debtor-in-possession financing, leading some to believe that unsecured bondholders stood to ultimately fare better.

On the secured bonds, American’s bonds in some cases had stronger structures securing repayment than previous airlines that challenged their lease structures.

As merger discussions heated up this year, the position of unsecured bondholders was bolstered by comments from AMR officials that there was ultimately some chance at recovery for equity holders, a rarity in bankruptcy. “If that happens you have a par bond with accrued interest” since equity investors are the last to be repaid, said one market participant.

The airline’s unsecured bonds include debt issued for projects at Dallas-Fort Worth International Airport, Alliance Airport, Luis Munoz Marin International Airport in San Juan, Chicago’s O’Hare International Airport, and Newark Liberty International Airport.

O’Hare bonds dropped to 18 cents on the dollar from the 40-cents range after the bankruptcy filing and rose to the 60s range last October, then up to 75 cents in December, and then into the 80s last month. It traded at 96 cents on the dollar on Tuesday. A DFW bond traded at 60 cents to 70 cents late last year and rose into the 80s range early this year. Trades on Tuesday valued the bonds at 82 cents to 87 cents on the dollar and Thursday trades assigned full value.

The secured bonds have been holding steady at full value and in some cases at a premium.  They secured bond-funded projects at New York City’s John F. Kennedy International Airport, Los Angeles International Airport, and for its maintenance base at Tulsa Municipal Airport. A pending settlement agreement treats a portion of the New York bonds as an unsecured claim. One of those bonds was trading this week at near to full value.

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