Docket Update: AMR Moves to Refinance Certain EETC at Par
This afternoon, American Airlines filed a motion with the bankruptcy court to repay certain existing prepetition debt. In a subsequent 8K/press release, the company notes, that in addition to obtaining post petition financing of $1.5B, AMR will also (my emphasis added):
...use cash on hand (including proceeds of the New EETC) to indefeasibly repay the existing prepetition obligations secured by the Aircraft, as applicable, which are currently financed through, as the case may be, an EETC financing entered into by American in July 2009 (the “Series 2009-1 Pass Through Certificates” (CUSIP: 023763AA3)), a secured notes financing entered into by American in July 2009 (the “13.0% 2009-2 Senior Secured Notes” (CUSIP: 023771R75)) and an EETC financing entered into by American in October 2011 (the “Series 2011-2 Pass Through Certificates” (CUSIP: 02377VAA0)), in each case without the payment of any make-whole amount or other premium or prepayment penalty.Members and guests of the DDIC will know that I've been involved in the American Airlines bankruptcy since its very beginnings via the 2001-1 EETC (A and B tranche specifically). This trade has worked out wonderfully and I've since taken off most of the trader. For those interested, you can find the write up here: Hunter AMR Write-Up
As noted above, AMR will attept to repay three pieces of paper (I've included notional amounts according to Bloomberg and trading levels prior to announcement):
- 2009-1 EETC: 108.5-109.5 -> $446M
- 13% 2000-2 Secured Notes: 106.25-107.25 -> $174M
- 2011-2 EETC: 106.75-107.75 -> $704M
...without paying a make-whole amount, premium, or prepayment penalty. If all this paper is taken out at par, investors will lose (market loss) approximately $100M.
Needless to say, a number of law firms better start sharpening their pencils because those note holders will not go down without a fight. Especially with that much market loss staring them in the face.
I've really only spent significant time with the 2009-1 EETC. I've spoken to many parties even before the filing and my read was that AMR didn't have to pay the make-whole. The language is difficult, and there looks to be some drafting oversights, but net/net I believe those bonds in particular can be taken out at par (the indentures are embedded in the motion below). I didn't think they would actually do it (refinance the paper), but demand for airline collateral is red-hot now and they will be able to cut substantial interest expense and free up collateral in this move. The motion notes: "If the Debtors are able to take advantage of the existing low interest rate environment and issue the New EETC at rates comparable to the recent financings described above, the interest expense savings by the Debtors would be well in excess of $200 million."
Other investors believed otherwise hence the premium pricing on the bond which was still well back of similarly over-collateralized, high quality EETC. I believe some investors even thought there was a chance these deals had to be taken out at the make-whole which would also explain the pricing.
I would not expect the bonds to trade directly to par. There will still be option value here for litigation claims, some sort of mediation or agreement in principal in a premium refinancing.
I have embedded the motion below. A hearing is set to occur at the end of October on the motion.
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On the make-whole / prepayment premium point, the (generally accepted) argument is that, unless there is specific language in the debt document to the contrary, a make-whole or prepayment premium would not be payable after acceleration of the underlying debt (including as a result of bankruptcy) because, once accelerated, the debt is due and payabale and cannot, technically, be "prepaid". The economic basis for this argument is that these provisions are designed to protect yield and once a lender has accelerated the underlying debt, the lender has, in a sense, forfeited its right to protect the yield on its loan in order to recover the outstanding amount of its loan.
The (generally accepted) argument is that a prepayment / make-whole premium is not payable after the underlying debt has been accelerated, including as a result of bankruptcy, because accelerated debt is due and payable and cannot, as a technical matter, be "prepaid". The economic basis for this argument is that, by accelerating the underlying debt, the creditor has forfeited its right to protect the yield on the debt in favor of recovering the outstanding amount of the debt.
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