AMR Holders Lose 19 Cents on Dollar on Blocked Deal: Muni Credit
By Michelle Kaske – Aug 28, 2013 12:01 AM ET
Municipal-bond investors are among the biggest losers from the Justice Department’s suit to block a planned $11.5 billion merger between US Airways Group Inc. and AMR Corp. (AAMRQ), parent of American Airlines.
About $3.4 billion of munis backed by revenue from bankrupt AMR and American helped finance airport construction in cities from Los Angeles to New York. The securities sank in price after the Justice Department Aug. 13 filed a motion to halt the merger, which would create the world’s biggest carrier.
AMR debt sold for Fort Worth Alliance Airport, near the company’s Texas headquarters, lost as much as 17 percent of its value the day after the motion, data compiled by Bloomberg show. The bonds have also been punished as investors pulled $21.4 billion from muni mutual funds over 13 weeks through Aug. 21, the most since 2011, Lipper US Fund Flows data show.
“Some significant uncertainty has been injected into this,” saidJohn Miller, who helps manage $90 billion of munis, including about $400 million of AMR debt, as co-head of fixed-income at Nuveen Asset Management LLC in Chicago.
The lawsuit created an obstacle in AMR’s attempt to exit bankruptcy through a union with Tempe, Arizona-based US Airways. The move surprised bondholders after the department had allowed six airlines to merge in the past five years.
Combining the carriers would increase ticket prices and reduce competition “substantially,” according to the department’s Aug. 13 filing.
The debt, while backed by airline revenue, belongs to a category of municipal securities called industrial development bonds, which are sold by local authorities to help finance projects that serve a public purpose. Some of the airline obligations give holders a partial tax exemption.
AMR bonds sold for Fort Worth Alliance Airport, which serves cargo and corporate flights, and maturing in December 2029 fell by 19.3 cents on the dollar to an average price of 92.08 cents Aug. 14, the day after the suit’s filing, Bloomberg data show. The bonds rebounded in the past week and last traded Aug. 27 at par.
Some securities sold for Dallas-Fort Worth International Airport have yet to recover. Debt maturing in May 2029 last traded Aug. 16 with an average price of 87.5 cents on the dollar, down from 113.75 cents on the previous day they traded, Aug. 7.
Transportation-related munis lost about 0.8 percent in the same period, compared with a 0.7 percent decline for the rest of the municipal market, Standard & Poor’s data show.
The lawsuit “made it more difficult to price those bonds accurately, because where things are going to go is an unknown,” said Matt Fabian, managing director at Concord, Massachusetts-based Municipal Market Advisors.
Bondholders haven’t received principal and interest payments since AMR filed for bankruptcy in November 2011. The carrier’s finances may allow investors to regain some, if not all, of their money even if the company emerged from bankruptcy without US Airways, Nuveen’s Miller said.
“They have positive cash flow and they have positive cash on hand,” Miller said. “And they are today operating as an independent company.”
While investors may have to wait longer to get repaid if American were to operate on its own, bankruptcy should help the carrier reduce its obligations and make it stronger, said Jim Murphy, who oversees the $2.3 billion T. Rowe Price Tax-Free High Yield Fund from Baltimore. Holdings include $23 million of AMR debt.
“Investors should end up getting pretty close to par plus accrued interest in the event that the merger doesn’t happen,” Murphy said. “That will probably take more time, but we think that there’s reasonable value there.”
AMR bonds, which are rated speculative grade, have been volatile since the bankruptcy filing. The Fort Worth Alliance debt traded at about 17 cents on the dollar on Nov. 29, 2011, and soared to 114.13 cents May 28, the highest since their 2007 sale, Bloomberg data show.
AMR last week told a bankruptcy judge that its reorganization plan should be approved even though the Justice Department is seeking to block the merger. Waiting to resolve the government’s objections would be “destabilizing,” AMR said Aug. 23 in a filing in U.S. Bankruptcy Court in Manhattan.
A hearing is set for Aug. 30 to schedule a trial date. AMR and US Airways have said they want the case tried in November. The U.S. said in a filing yesterday in federal court in Washingtonthat the trial shouldn’t begin before March 3.
In the market for new issues, New York City Housing Development Corp. plans to sell about $655 million of revenue bonds as soon as today, as localities offer a combined $4.6 billion of long-term debt sales this week, Bloomberg data show.
At 3.11 percent, yields on benchmark 10-year muni bonds are the highest since April 2011, and compare with about 2.7 percent for similar-maturity Treasuries.
The ratio of the yields is about 115 percent, the highest since July 2012 and above the five-year average of 101 percent. The greater the figure, the cheaper municipal securities are relative to Treasuries.
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