Markets & Finance

S&P Cuts AMR, American Airlines Credit Ratings


On Feb. 28, 2003, Standard & Poor's lowered its ratings for AMR Corp. (AMR) and subsidiary American Airlines Inc., including lowering the long-term corporate credit ratings for both entities to 'B-' from 'BB-', and revised the CreditWatch implications on those ratings to developing from negative (see list below).

The downgrade reflected continuing heavy losses and diminishing liquidity, with the potential for a voluntary bankruptcy filing by midyear if American is not able to negotiate significant concessions from its labor groups. Ratings on most nonenhanced equipment trust certificates were lowered to the level of the corporate credit rating, as collateral for these obligations (mostly B757-200s, MD82s, and B767-300s from the late 1980s and early 1990s) have lost considerable value and Standard & Poor's anticipates that American would seek to renegotiate the equipment trust certificate terms in any bankruptcy proceeding.

AMR reported a net loss of $529 million in the fourth quarter of 2002, a decline from the $734 million net loss, before special items, in the prior-year period, and a full-year 2002 net loss of $3.5 billion ($2.0 billion before special items), an increase from the $1.4 billion net loss, before special items, in 2001. Any war between the U.S. and Iraq, a prospect that has already raised airline fuel prices, would cause a further erosion of revenues and raise already high fuel costs (at least for a while), widening the company's losses.

American is the world's largest airline, with an extensive route system and leading or substantial market shares in the U.S. domestic market, on trans-Atlantic routes, and on routes to Latin America.

American has accelerated negotiations with its unions and is seeking about $1.8 billion of annual concessions from employees, equal to about 21% of 2002 labor expense. This is in addition to an ongoing program to lower other, nonlabor costs by an eventual $2 billion annually, compared with pre-September 11, 2001, expenses (management states that about $900 million of these savings were reflected already in 2002 results).

Although securing labor concessions outside of bankruptcy has historically been very difficult for airlines, prospects for success are bolstered by the severe pay and benefit reductions that have been negotiated or imposed on employees at bankrupt competitor United Air Lines Inc., with further concessions anticipated. That precedent shows that the sacrifices imposed on employees in any bankruptcy would be even more onerous than what American's management is proposing. AMR and American are seeking also more limited concessions from suppliers, aircraft lessors, and private creditors; no attempts to renegotiate public debt are anticipated outside of bankruptcy. Success in those talks is important for the labor negotiations, as the unions will not agree to pay cuts without evidence of other parties accepting sacrifices.

Liquidity: Unrestricted cash and investments were over $1.9 billion at Dec. 31, 2002, with restricted cash of $775 million. AMR expects to receive a cash tax refund of over $550 million by the end of the first quarter of 2003. Capital expenditures for 2003 are about $1.4 billion, but $1.1 billion of that has financing commitments in place (mostly from aircraft manufacturers). American's secured bank facility has no availability and the company will almost certainly be in violation of a covenant that measures fixed-charge coverage for the six months through June 30, 2003, which could accelerate repayment of $834 million of borrowings. If American is able to reach agreement on substantial cost reductions from its unions, it appears likely that the banks would be willing to amend the agreement to waive the violation. If not, American and AMR would likely choose to file for bankruptcy. AMR would in that case likely plan to have at least $1 billion of unrestricted cash on hand, and should be able to arrange a debtor-in-possession facility as large as United's $1.5 billion in facilities.

Ratings for AMR and American could be lowered if American is not able to negotiate significant labor concessions to stem its losses, or if any U.S.-Iraq war and/or renewed terrorism further erodes the companies' financial position. Alternatively, ratings could be raised modestly if American is successful in its cost-cutting efforts.

Ratings lowered, CreditWatch revised to developing from negative

AMR Corp.

Category

To

From

Corporate credit rating

B-

BB-

Senior unsecured debt

CCC

B

Senior secured debt

B-

BB-

American Airlines Inc.

Category

To

From

Corporate credit rating

B-

BB-

Senior secured debt

B-

BB-

Equipment trust certificates

B+

BB+

Pass through cert., series 1999-1A-1

BBB+

A+

Pass through cert., series 1999-1A-2

BBB+

A+

Pass through cert., series 1999-1B

BB+

BBB+

Pass through cert., series 1999-1C

BB-

BBB-

Pass through cert., series 2001-1A1

BBB-

A-

Pass through cert., series 2001-1A2

BBB

A

Pass through cert., series 2001-1B

B+

BB+

Pass through cert., series 2001-1C

B

BB

Pass-through cert., series 2001-1D

B-

BB-

Pass through cert., series 2001-2A1

A-

AA-

Pass through cert., series 2001-2A2

A-

AA-

Pass through cert., series 2001-2B

BBB

A

Pass through cert., series 2001-2C

BB+

BBB+

Pass through cert., series 2001-2D

B+

BB+

Pass through cert., series 2002-1C

BB-

BBB-

Pass through cert., series 1991C

CCC+

BB+

Equip. trust certificates, series 1986A

B+

BB+

All other equipment trust cert.

B-

BB+

Rating withdrawn

American Airlines Inc.

Category

To

From

Short-term corporate credit rating

NR

B

From Standard & Poor's CreditWire


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