AMR Corp.'s bankruptcy filing is taking a toll on one corner of the bond market: tax-exempt debt issued by local government agencies but backed by the parent of American Airlines.
The market value of these high-yield bonds fell 27% Tuesday, to $1.6 billion, from $2.2 billion at the close of business Monday, according to S&P Indices, as uncertainty surrounding AMR's filing caused some investors to shun the debt. The face value of the bonds originally was about $3 billion.
About half of these bonds—called "conduit" debt because a local government acts as a conduit between a private company and the municipal-bond market, where borrowing costs are significantly lower because interest payments are tax exempt—are unsecured. The rest is backed by collateral such as the rights to use gates at certain airports.
The repayment of corporate-backed conduit bonds is guaranteed by the company or by the specific revenue generated from the project the debt finances.
AMR's secured conduit bonds attracted bids of about 80 cents on the dollar late Wednesday morning, compared with about 90 cents before AMR filed for bankruptcy protection, said portfolio managers. Meanwhile, AMR's unsecured debt, including bonds supporting a project at Dallas/Fort Worth International Airport, was drawing bids at about 17 cents on the dollar, down from more than 40 cents before the bankruptcy filing.
AMR's high-yield corporate bonds didn't fare much better. A batch of AMR taxable corporate debt due in August 2021 traded as low as 16 cents on the dollar Wednesday, down from 38.15 cents on Monday. AMR bonds due September 2016 fell to 20 cents from 39 cents two days earlier, according to MarketAxess data, while bonds due October 2012 fell to 88.75 from 91.
Such trading "makes complete sense," said Chris Ryon, co-manager of Thornburg Municipal Bond Funds in Santa Fe, N.M., which has about $6.9 billion of municipal assets under management. Thornburg doesn't own any American Airlines-backed debt.
According to BondDesk Group data, unsecured American Airlines bond prices began to deteriorate in late September. Trading volume of the airline's tax-free debt in general has picked up over the past two to three months, though it still is lightly traded.
While selling has been pervasive since AMR filed for bankruptcy protection on Tuesday, there also has been an increased demand for the secured bonds, with some investors "presumably hoping for better recovery than perceived by the market in the case of default," said Chris Shayne, senior market strategist at BondDesk.
Indeed, it is possible some investors may have overreacted in selling AMR-backed muni debt after its bankruptcy filing, said Anthony Valeri, market strategist at LPL Financial in San Diego. He said some United-backed Denver airport debt repaid investors in full following that airline's bankruptcy in 2002. Mr. Valeri is suggesting his network of financial advisers not to reduce high-yield muni-bond exposure for clients in the wake of AMR's bankruptcy filing.
"If American Airlines intends to successfully emerge from bankruptcy, it is likely they will continue to make gate lease payments especially for busy New York and Los Angeles hubs, which comprise approximately 60% of AMR-backed municipal debt," Mr. Valeri said. "Failure to do so would mean reduced access to these markets and losing market share to competitors."
Conduit debt makes up about 30% of debt issued in the $2.9 trillion muni market, according to Municipal Market Advisors. However, airline-backed muni debt makes up about $8 billion, or less than 1%, of the debt outstanding in the muni market, according to data from Bank of America Merrill Lynch.
However, other major airlines, such as Southwest Airlines Co. and Delta Air Lines Inc., have sold tax-free debt through conduits like airport authorities or other municipal agencies.
WSJ
