The attempt by the parent of American Airlines to force bondholders to take a major haircut is “somewhat unique” in aviation bankruptcy cases, one Miami attorney says.
“Here American has fairly expensive bonds,” said Jay Sakalo, a partner in the restructuring and bankruptcy practice group at Bilzin Sumberg Baena Price & Axelrod. “The market has reset, and they’re trying to take advantage by replacing the existing bonds with newer lower yielding bonds. From an economic standpoint, it makes sense. The question is, can they accomplish it?”
Sakalo is not involved in the AMR case.
AMR Corp., the owner of American Airlines, the dominant carrier at Miami International Airport, wants court permission to repay debt backed by jets while avoiding having to pay the bondholders as much as 50 percent more than face value, according to an Oct. 9 filing in U.S. Bankruptcy Court in Manhattan. It plans to refinance the $1.3 billion in securities with similar debt at lower rates. The company says that it will trim $200 million of interest expense though the move.
While the existing notes have lost as much as $60 million in value, they’re trading above the call price, indicating investors expect the airline won’t succeed. Fort Worth, Texas-based AMR wants to take advantage of record-low interest rates that have boosted demand for high-yield, high-risk securities.
AMR is seeking authorization to redeem $445.6 million of 10.375 percent pass-through certificates, $174.2 million of 13 percent secured notes and $703.6 million of 8.625 pass-through certificates, “without the payment of any make-whole amount” or “any other premium or prepayment penalty,” the company wrote in the filing.
The 8.625 percent pass-through certificates plunged 4.5 cents on the dollar Wednesday to 103 cents to yield 8.15 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Those notes have a make-whole call that would require the company to pay about 156 cents on the dollar to redeem them now, Bloomberg data show.
While fairly common in larger bankruptcy cases, AMR’s attempt to eliminate its obligation to pay the make-whole costs is “somewhat unique” in aviation bankruptcy cases, Sakalo said.
AMR’s request “comes at a time in the case when they are really trying to define the contours of an exit strategy,” Sakalo said. “This is clearly a component that they wish to address positively or negatively so they know what the exit costs will be.”
Sean Collins, an AMR spokesman, declined to comment beyond an Oct. 9 statement that summarized the filing.
It will be up to the court to decide if bankruptcy allows AMR to avoid paying the make-whole call, Roger King, an analyst at New York-based CreditSights Inc., said in a telephone interview.
“All they might have to pay in the eyes of the bankruptcy court is pay the principal and interest,” he said. “If the bankruptcy hadn’t happened in the middle, then they would have to pay make whole.”
Make-whole provisions, under which investors receive a premium if the securities are redeemed early, are included in credit agreements to create a disincentive for borrowers to call bonds before their scheduled maturity. Lenders would rather keep the current high-coupon debt than have to reinvest the cash into lower-yielding notes.
The provisions “tend to be a lot more expensive, so investors like that because that means they won’t be ripping them away from me down the road,” said Vicki Bryan, an analyst for New York-based debt researcher Gimme Credit LLC. “But that’s exactly what American Airlines is trying to do, rip it away and not pay you.”
AMR would have to pay holders of the 10.375 percent notes 155 cents and owners of the 13 percent bonds 144 cents to retire the bonds under the make-whole provision.
The bankruptcy judge will likely depend on the specific language of the indenture, or contract between AMR and the bondholders, to see if a provision exists “that alters the analysis of whether damages are unenforceable as essentially unmatured interest claims,” Sakalo said. Unmatured interest claims are not enforceable in bankruptcy cases.
The 13 percent securities are rated B by Standard & Poor’s, and the two other notes, which are issued by special-purpose trusts, are ranked BBB-, the lowest investment grade, and an equivalent Baa3 at Moody’s Investors Service.
AMR is also seeking the court’s approval to issue $1.5 billion in EETCs to refinance the older debt, according to the filing. The new debt also contains make-whole provisions, which Gimme Credit’s Bryan said might not entice buyers. “Why should I believe you? You’re giving me the same terms of something you’re trying to break right now.”
AMR filed for bankruptcy protection on Nov. 29 after failing to get cost-cutting labor agreements, listing $29.6 billion in debt and $24.7 billion in assets and becoming the last of the so-called U.S. legacy carriers to seek court protection from creditors.
“Time is of the essence because there can be no assurance that current market conditions will continue,” AMR said in the court document. “If the debtors are able to take advantage of the existing low interest rate environment and issue the new EETC at rates comparable to the recent financings described above, the interest expense savings by the debtors would be well in excess of $200 million.”
Objections to the filing are due by Oct. 23 at 4 p.m. New York time, according to the court document.
The certificate holders will undoubtedly file objections by the deadline, Sakalo said.
Equipment trust certificates generally have had a good repayment record because of certain investor protections, Philip Baggaley, an S&P analyst in New York, said in a telephone interview. For the first 60 days after filing for Chapter 11 bankruptcy protection, an airline doesn’t have to pay its aircraft obligations. After that, creditors can immediately repossess the planes if payments aren’t made. Recent EETCs tend to be “cross-collateralized,” meaning airlines aren’t allowed to pick and choose what planes they want to keep.