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American Airlines parent AMR Corp. (AMR) won’t give two of its lenders more protection on collateral for almost $1.5 billion of the company’s debt, after they had sought assurance about the eroding value of the bankrupt carrier’s aircraft and other assets.
Separately, AMR Corp. won permission to hire a group of legal and financial advisers for its bankruptcy after some changes were made to answer concerns raised by unions and the U.S. government about whether they are all necessary. The company also said in a monthly operating report today that it had $347 million in cash as of Jan. 31, and had a net loss of $234 million before taxes for the period. Its cash and short term investments held at $4.14 billion.
U.S. Bankruptcy Judge Sean Lane in Manhattan today denied requests from U.S. Bank Trust NA and Wilmington Trust Co., saying the company currently had more than enough value to protect both banks’ collateral, and that they could come back later if that changes.
“It’s not July yet,” Lane said, responding to comments from lawyers for U.S. Bank who said that by then, the company might not have enough assets to be collateral for the $450 million in 10.5 percent notes due 2012, for which it serves as a trustee.
The notes fell from 103.00 cents on the dollar to as low as 101.24 in trading today, down 1.7 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Wilmington Trust, a trustee for 7.5 percent notes due 2016, was denied a similar request on behalf of $1 billion in principle of notes in which Citibank also has a stake.
Fort Worth, Texas-based AMR, parent of the third-biggest U.S. airline, filed for bankruptcy in November, saying it needed to reduce costs and restructure debts to compete with other carriers that used bankruptcy to jettison pensions and retiree benefits and secure new labor agreements. It has said it will eliminate 13,000 jobs under a plan to cut annual operating costs by $2 billion and boost revenue by $1 billion.
Advisers hired included Rothschild Inc., McKinsey & Co., Weil Gotshal & Manges LLP, the company’s main bankruptcy law firm, Boston Consulting Group, and Bain & Co., which will act as adviser to American Eagle, according to court papers.
“I don’t do this lightly,” Lane said, noting concerns about the cost to the estate. “This is bankruptcy court and you need to make some changes.”
The U.S. Trustee, which monitors bankruptcy proceedings for the U.S. Justice Department, had claimed that AMR hasn’t shown it needs all the advisers, that there was a high potential for duplicate services and that some of them had possible conflicts of interest. The Association of Professional Flight Attendants and the Transport Workers Union had also objected.
U.S. Bank Trust’s loan is secured by 143 aircraft, engine parts and $41.5 million in cash, according to court papers. U.S. Bank Trust asked for assurance its collateral would be protected, such as making sure repairs to all aircraft were promptly made. As an alternative, the bank said it wanted the ability to seize its assets or get a first-priority claim on them.
“I don’t believe that’s a serious risk; that the debtors would do something to undermine the value of their enterprise,” Lane said, adding that AMR would probably to keep its fleet in good shape for its own reasons. A change in the airline industry or fuel costs could change circumstances, at which point the banks could re-argue their requests, he said.
Lawyers for AMR said in court papers that assertions that the company isn’t maintaining the aircraft are “unfounded.” Stephen Karotkin, a lawyer for AMR, told Lane today that the aircraft were being maintained properly, and that there’s an “cushion” that protects both lenders from any decrease in value.
Wilmington Trust said in court papers that its collateral, valued at $2.37 billion around March 2011, had declined in value by over $840 million in the nine months prior to AMR’s bankruptcy.
The notes due in 2016 are secured by assets including leases on gates and slots at certain airports, and are essential for American to continue some flights into Heathrow Airport in England, Narita International Airport in Japan, Haneda Airport in Japan, and Beijing Capital International Airport and Shanghai Pudong International Airport in China, according to court papers.
Separately, a request to appoint an official committee to represent 240 TWA Pilots was delayed until March 6. The Independent Cockpit Alliance Inc., which requested the committee, said it had new facts and would submit a new motion this week. The alliance said pilots from the former Trans World Airlines, brought into AMR through an acquisition in 2001, have been historically discriminated against.
AMR has objected, saying the alliance isn’t qualified to request another committee in the case. A nine-member creditors committee already represents pilots through the Allied Pilots Association.
The case is In re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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