AA Bondholders Debate Its Future

By MIKE SPECTOR from the Wall Street Journal dated 1.9.13

American Airlines bondholders this week signed confidentiality agreements so they can examine nonpublic information and weigh whether the airline should merge with rival US Airways Group Inc. or emerge from bankruptcy proceedings as an independent company, said people close to the talks.

The bondholders hold more than $2 billion in debt issued or backed by American and its parent, AMR Corp.,AAMRQ -5.43% making them an nfluential subset of creditors, who also include labor unions and suppliers. The bondholders own nearly enough of the airline's obligations to block any path out of bankruptcy protection that they dislike, according to the people and court documents. The upshot is American needs the bondholders to agree on the terms of whichever path it chooses.

The bondholders on Tuesday met with American executives and advisers at the New York offices of the airline's bankruptcy lawyers at Weil, Gotshal & Manges to hear the company's views on a merger versus a stand-alone restructuring plan, the people said. They plan to meet with US Airways executives and advisers on Thursday, the people said.

The bondholders include hedge funds that have formed an ad hoc committee and other investment firms that own American-backed bonds issued by municipalities for things such as airport facilities, the people said. The bondholders and their advisers coalesced in recent weeks to better influence the outcome of the Fort Worth, Texas-based airline's bankruptcy exit.

The start of the bondholders' confidential deliberations furthers the expectation that American, the No. 3 U.S. airline by traffic, will decide in the next several weeks whether to pursue a merger with US Airways. The bondholders expect to take much of January to study American's choices, the people said.

American's board met Wednesday to discuss bankruptcy-exit options and hear updates on the airline's reorganization, according to people familiar with the matter. No significant decisions were expected to come out of the meeting.

US Airways has been pressing for a merger for more than a year. American, while exploring a merger, has been emphasizing its independent strength.

AMR Chief Executive Tom Horton told employees in a memo earlier this month that the airline is a "matter of weeks" away from making the decision. A marriage could create the largest U.S. airline by traffic, surpassing United Continental Holdings Inc.UAL -1.01%

American filed for bankruptcy protection in November 2011 looking to cut labor costs to better compete with rivals, and has since renegotiated contracts for unionized pilots, flight attendants, ground workers and mechanics. The airline for months said it wanted to emerge from bankruptcy court as an independent company, but later started merger talks with US Airways amid pressure from creditors.

The bondholders now in discussions with American and US Airways include J.P. Morgan Securities, JPM +1.50% Litespeed Management LLC and Pentwater Capital LP. Nuveen Investments, OppenheimerFunds and Blackrock Inc., BLK +1.81% are among those holding the airline's municipal bonds, according to people familiar with the investments.

The bondholders want to get a better grasp on how quickly additional revenue and cost savings would be realized in a merger and the terms governing how pilots would be integrated into a combined airline, including their seniority and pay, the people said. The bondholders will then compare the expected financial benefits and risks of a merger with American's plan to an exit from bankruptcy protection alone.

US Airways has said a merger would reap $1.2 billion in financial benefits, though American believes the synergies are less favorable, according to people familiar with the matter. The two airlines and their pilots, meanwhile, spent much of December in negotiations over how the aviators and other workers would be treated in a merger. American pilots have approved a memorandum of understanding negotiated during the talks, and US Airways' pilots are expected to vote on the deal this month.

American's bankruptcy lawyer, Harvey Miller, this week wrote a letter suggesting existing shareholders could get some recovery on their investment, an unusual occurrence in bankruptcies. He didn't disclose details of the airline's finances. But if common shareholders get something, that suggests creditors could be repaid in full.

The bondholders now in discussions with American and US Airways will likely consider that as they scrutinize the terms of US Airways' merger proposal to American. US Airways proposed late last year that American creditors own 70% of a combined carrier and US Airways' shareholders 30%. The proposal also suggested US Airways Chief Executive Doug Parker run the combined airline.

The bondholders haven't decided who should run American after it emerges from bankruptcy protection, according to people familiar with their thinking. They haven't endorsed Mr. Horton as the person to lead a merged or independent airline. The ad hoc bondholders in November sent a letter to American pilots saying they would only support American emerging from bankruptcy as an independent airline only if the company installed a new board of directors that selected a management team that would "maximize shareholder value."

American's creditors are expected to assert roughly $9.5 billion in unsecured claims against the airline, according to Kevin Starke, a managing director at CRT Capital Group LLC, a broker-dealer that trades the airline's bankruptcy claims. With $2 billion already, the bondholders could buy up more debt or rally other creditors to block American's reorganization plan, because the company needs creditors holding roughly two-thirds of debt to back any path it chooses.

Write to Mike Spector at [email protected]