Bloomberg News

AMR Wins U.S. Court Approval for $1.5 Billion Financing

January 18, 2013

AMR Corp. (AAMRQ:US), the American Airlines parent restructuring in bankruptcy, won court approval for $1.5 billion in aircraft financing, defeating bondholder opposition to a plan to repay debt.

U.S. Bankruptcy Judge Sean Lane in Manhattan approved American’s request for the financing in a decision filed yesterday, overruling an objection from a noteholder trustee that said the company owes a premium called a make-whole amount when it refinances.

“The noteholders here are entitled to receive full repayment of principal and accrued interest without a make-whole amount, which is exactly what they bargained for in these circumstances,” Lane said.

AMR, which filed for bankruptcy in 2011, sought court approval in October for the financing to take advantage of lower interest rates, saying it may save more than $200 million in interest expense. The airline said it would use proceeds to repay about $1.3 billion in debt backed by aircraft under three series of notes.

The proposal was opposed by trustee U.S. Bancorp, which sued the Fort Worth, Texas-based airline in bankruptcy court. It said AMR was required to pay the make-whole amount under the terms of existing notes.

Michael Burke, an attorney for U.S. Bancorp, didn’t respond to a phone message or e-mail seeking comment.

Borrower Disincentive

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.

Vicki Bryan, an analyst at Gimme Credit LLC, said in a phone interview that she was concerned about the decision because AMR was “attacking” a fundamental provision that protects investors in the high-yield credit market.

“This fundamentally weakens again even more what investors can expect in protection in high-yield debt,” she said.

The 13 percent secured notes fell 3.7 cents on the dollar to 103.3 cents today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The 8.625 percent pass-through certificates dropped 4.5 cents to 103.75, and the 10.375 percent pass-through certificates fell 4.5 cents to 103.5.

AMR Spokesman

“We are pleased with Judge Lane’s decision and that he agreed with our position,” AMR spokesman Sean Collins said in a statement.

Lane rejected the trustee’s arguments in his decision. American’s bankruptcy filing triggered an automatic acceleration of the amounts due under the notes without the make-whole payment, the judge said.

“In the case of a voluntary redemption, a make-whole amount is due, but if payment is made due to acceleration, it is not,” Lane wrote.

The case is in re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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