US hedge funds York Capital Management and King Street Capital are among a handful of AMR bondholders joining forces in hopes of boosting potential paybacks on more than USD$700 million in unsecured AMR debt, according to people familiar with the matter.
The group, which also includes Marathon Capital, Claren Road Asset Management, Pentwater Capital Management and Litespeed Management, is studying a proposal from US Airways to merge with the bankrupt parent of American Airlines, but has yet to pledge support for the idea, the people said.
The group plans to study merger scenarios to determine if a deal with US Airways or another carrier will yield higher recovery on their bankruptcy claims than AMR’s plan to emerge from bankruptcy independently, the sources said.
The bondholders have organised in recent weeks, retaining bankruptcy lawyers and financial advisers. The group holds some USD$700 million to USD$1 billion of AMR’s total USD$2.4 billion in unsecured debt, the sources said.
Hedge fund Appaloosa Management has expressed some interest in potentially joining the group but is not a member yet, they said. Appaloosa declined to comment.
The organising of some AMR bondholders comes as AMR has agreed to work with its unsecured creditors committee to develop potential merger scenarios while it is still in bankruptcy, bowing to pressure from its unions and other creditors to consider a merger with US Airways.
Before that May 11 agreement, AMR had shrugged off interest expressed by smaller rival US Airways, saying it could consider a tie-up after it exits bankruptcy as a standalone company.
AMR filed for bankruptcy in November, citing untenable labour costs. The company has said it needs to shed USD$1.25 billion in annual labour costs to become profitable.
AMR said it would consider all restructuring options, including a “full range of potential consolidation scenarios,” in addition to a standalone plan.
“What’s best for our company, our people and our financial stakeholders will be determined by the facts in a disciplined manner and process,” the company said in a statement.
The bondholders already have a standing on AMR’s unsecured creditors committee, but only indirectly through the banks acting as their trustees: Wilmington Trust, Bank of New York Mellon and Manufacturers & Traders Trust.
Forming a group outside the committee could give bondholders a more robust role in restructuring negotiations, as creditors’ committee members must act not only on their own behalf, but in the interest of creditors overall.
The sources asked not to be named because the matter is not public.
The bondholder group has started preliminary discussions with AMR management and signed a confidentiality agreement to gain access to the airline’s financials, business and potential merger scenarios, the sources said.
Separate from the bondholders that have come together under one umbrella, there are several mutual funds, including OppenheimerFunds, that hold large chunks of AMR debt but are invested in a different part of the airline’s capital structure, according to the people close to the matter.
It remains unclear whether those funds’ interests will be aligned with the bondholder group’s. A spokeswoman for OppenheimerFunds declined to comment.
People familiar with AMR management’s thinking have said that management wants to negotiate a merger on its own terms after emerging from bankruptcy, and could set its sights on different targets, ranging from JetBlue Airways to Alaska Air to US Airways.
But the president of the Allied Pilots Association, which represents AMR’s pilots, told reporters this week that US Airways is the only realistic and willing merger partner for AMR.
APA President David Bates said he had not seen interest from either JetBlue or Alaska Air on a potential merger, while a deal with bigger carriers United or Delta Air Lines would not get regulatory approval.
Bates said US Airways is the only company that has been in contact with the unions to pitch a merger.
The three unions representing AMR’s pilots, flight attendants and ground workers have struck a deal with US Airways that they say would preserve more than 6,000 jobs that would otherwise be doomed under AMR’s standalone plan.
The APA is now working with US Airways’ management and its pilots union on a unified collective bargaining agreement, a move Bates said could remove a major hurdle in securing a merger.
US Airways has said that a merger would also generate at least USD$1.2 billion a year in new value beyond the benefit that could be passed on to employees of the combined carrier. AMR has said its stand-alone plan would generate USD$3 billion in new revenue and savings by 2017.
Virasb Vahidi, AMR’s chief commercial officer, praised AMR’s standalone plan.
“Our strategy is already working, with improvements in revenue in the first quarter outpacing the industry, and multi-year highs in our operating metrics,” Vahidi told reporters on Thursday. “We expect we will continue to improve once we complete our restructuring. It is simply misleading to suggest otherwise.”