11/29/11
AMR filed for bankruptcy protection on 11/29/11 in a surprise move because the company still had $4B in cash. During the company’s third quarter earnings call in mid-October, then Chairman and CEO Gerald Arpey made it clear that bankruptcy was not their preference or goal. Over the Thanksgiving weekend, AMR’s board decided that chapter 11 was the best route because its costs were much higher than its competitors and this was a way to bargain with their pilots union on a new contract. Gerald Arpey decided to retire and was replaced by Thomas Horton. JPM’s credit put a good research note describing the bankruptcy on 11/30/11. Their thoughts on the 7.5% bonds is summarized below.
The 7.5% first lien routes/gates/slots bonds due 2016 are the most interesting security to analyze. It’s big and liquid with $1B outstanding. The structure is controversial, in that liens are not perfected on all of the collateral. The collateral, as of the February offering, includes 198 slots per week at Heathrow (or about 14 pairs per day), 70 slots at Tokyo Narita (5 pairs per day), 14 slots at Tokyo Haneda (1 pair per day), 14 slots at Shanghai Pudong (1 pair per day), 14 slots at Beijing (1 pair per day), and 82 slots at JFK related to this service (or about 6 pairs per day). The 7.5% bonds traded at about 80 prior to the bankruptcy and then down to 66 before bouncing back up to 72 a few days later.
There are a few risks with this security:
1) AMR may try to reject the collateral. This seems unlikely given the strategic importance of these routes to the business traveler centric AMR network.
2) Unsecured creditors try to claim that the deal is under-collateralized, which may be a tough argument given the $2.3B appraisal on the collateral as of February from Morton Beyer & Agnew, a reputable third party. However, not that this valuation is based on a DCF model, not a slot pair market value.
3) Unsecured creditors argue that the liens are not perfected, therefore the 7.5% holders aren’t secured, and thus they should be lumped into the general unsecured claims pool. There is not enough information or precedent to determine with any sort of certainty if this argument will fly with the judge, although we are fairly confident that unsecured holders will push for this catergorization of the 7.5% holders.
4) AMR decides later in the case that it indeed needs a DIP credit facility and that the 7.5% collateral is required collateral. We also think AMR could push for this outcome if they believe unsecured creditors will be successful in their arguments, as that would undermine AMR’s ability to refinance route/gate/slot secured debt going forward. A DIP involving these assets could take the form of a priming DIP where the DIP holders take a super senior lien or it could go down the pay to play road where the 7.5% holders are taken out only to the extent they roll their exposure into a new DIP loan.
AMR has three unsecured issues
6.25% converts due 2016 ($460m), 9% bonds due 2012($75m), 9% bonds due 2016 ($59m)
The converts traded down from 42 to 20, the 9% of 2012 from 73 to 20, and the 9% of 2016 from 39 to 20. Obviously, the bankruptcy filing was a big surprise since the 2012 bonds were trading at 73 with the hope that they would be repaid at par at maturity. On 11/30/11, UBS desk analysts calculated a quick and dirty recovery value of 31% based on 6.25x 2014 EBITDA of $3,350M for a net distributed value of $22,684M. After secured claims and other payments, the residual value for unsecured creditors is $3,411M with a claims pool of $10.972 (bonds +pension, OPEB, etc) for a 31% recovery. See more information in the desk analyst note (not supplied here).
AMR has many secured bonds and EETC issues. I will put the analysis here but there is a lot more detail in the JPM credit note on 11/30/11. It will be interesting to see how the bankruptcy plays out.