Credit Defaults on AMR soar to nearly 3X levels af industry

[WorldTraveler]

The market is incresingly seeing a bankruptcy as likely at AMR - and is pricing CDSs for AMR differently than it prices the rest of the industry.
.
^Credit-default swaps on AMR soared to 21 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $2.1 million initially and $500,000 annually to protect $10 million of AMR’s debt. Swaps on United Continental Holdings Inc. (UAL), Delta Air Lines Inc. (DAL) and JetBlue Airways Corp. (JBLU) jumped to a mid-price of 8.5 percent upfront, the data show. Swaps on Continental Airlines increased to 7.5 percent upfront. ^
http://www.bloomberg.com/news/2011-04-08/airlines-credit-risk-increases-as-crude-surpasses-113-a-barrel.html?cmpid=yhoo
.
Credit default swaps (CDS) are somewhat like insurance against default on debt but they are also speculative instruments in that it is not necessary to own the debt for which you are seeking the CDS.
.
Although CDSs are not traded on public markets like many stocks are, the market for large corporations is fairly active and pricing is therefore fairly well known.
.
The pricing on AMR CDSs at 21 plus 5 means that essentially the market is betting on a 1 to 4 basis that AMR will default on its debt through some mechanism (of which filing for bankrutpcy is the most likely scenario).
As a basis for comparison, the final price of CDS on DAL debt was 18 prior to its bankruptcy while NWA's CDSs priced at 28.
.
To highlight the challenges facing AMR management, increases in the price of debt (which is related to credit worthiness - and CDSs do influence credit ratings) may increase the amount of collateral that has to be put up by AMR for jet fuel hedges... and most hedging activity is suspended when a company files for bankruptcy since hedging does involve risks which might involve placement of collateral, which creditors want to protect.
.
Further, AMR has financial obligations (debt payments, aircraft expenditures, and associated commitments) over the next two years that are similar in size to DL and UA/CO even though AMR is a smaller company. (Financial commitments can be found in the 10K annual filings made by each publicly traded company - found in the investor relations section of their websites). CDSs are explained in layman's terms on wikipedia.
.
Because CDS and maintaining hedges both involve market perception of risk, it might be increasingly difficult for AMR to obtain the funding necessary to avoid bankruptcy.
.
AA/AMR/AE employees would be well served to carefully follow AA/AMR's first quarter earnings conference call and the associated filings to look for management's tone about the current situation.
Unless there is significant confidence, anyone with a financial interest in AMR/AA/AE would do well to think about their financial plans and contingencies, esp. those that are in the bottom 15-20% of the seniority for a workgroup, base, or category.

 

[Hopeful]

The market is incresingly seeing a bankruptcy as likely at AMR - and is pricing CDSs for AMR differently than it prices the rest of the industry.
.
^Credit-default swaps on AMR soared to 21 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $2.1 million initially and $500,000 annually to protect $10 million of AMR’s debt. Swaps on United Continental Holdings Inc. (UAL), Delta Air Lines Inc. (DAL) and JetBlue Airways Corp. (JBLU) jumped to a mid-price of 8.5 percent upfront, the data show. Swaps on Continental Airlines increased to 7.5 percent upfront. ^
http://www.bloomberg.com/news/2011-04-08/airlines-credit-risk-increases-as-crude-surpasses-113-a-barrel.html?cmpid=yhoo
.
Credit default swaps (CDS) are somewhat like insurance against default on debt but they are also speculative instruments in that it is not necessary to own the debt for which you are seeking the CDS.
.
Although CDSs are not traded on public markets like many stocks are, the market for large corporations is fairly active and pricing is therefore fairly well known.
.
The pricing on AMR CDSs at 21 plus 5 means that essentially the market is betting on a 1 to 4 basis that AMR will default on its debt through some mechanism (of which filing for bankrutpcy is the most likely scenario).
As a basis for comparison, the final price of CDS on DAL debt was 18 prior to its bankruptcy while NWA's CDSs priced at 28.
.
To highlight the challenges facing AMR management, increases in the price of debt (which is related to credit worthiness - and CDSs do influence credit ratings) may increase the amount of collateral that has to be put up by AMR for jet fuel hedges... and most hedging activity is suspended when a company files for bankruptcy since hedging does involve risks which might involve placement of collateral, which creditors want to protect.
.
Further, AMR has financial obligations (debt payments, aircraft expenditures, and associated commitments) over the next two years that are similar in size to DL and UA/CO even though AMR is a smaller company. (Financial commitments can be found in the 10K annual filings made by each publicly traded company - found in the investor relations section of their websites). CDSs are explained in layman's terms on wikipedia.
.
Because CDS and maintaining hedges both involve market perception of risk, it might be increasingly difficult for AMR to obtain the funding necessary to avoid bankruptcy.
.
AA/AMR/AE employees would be well served to carefully follow AA/AMR's first quarter earnings conference call and the associated filings to look for management's tone about the current situation.
Unless there is significant confidence, anyone with a financial interest in AMR/AA/AE would do well to think about their financial plans and contingencies, esp. those that are in the bottom 15-20% of the seniority for a workgroup, base, or category.

How much would you like to wager that all this dire financial outlook will have ZERO effect on the upcoming executive PUP pay?

 

[damajagua]

The market is incresingly seeing a bankruptcy as likely at AMR - and is pricing CDSs for AMR differently than it prices the rest of the industry.
.
^Credit-default swaps on AMR soared to 21 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $2.1 million initially and $500,000 annually to protect $10 million of AMR’s debt. Swaps on United Continental Holdings Inc. (UAL), Delta Air Lines Inc. (DAL) and JetBlue Airways Corp. (JBLU) jumped to a mid-price of 8.5 percent upfront, the data show. Swaps on Continental Airlines increased to 7.5 percent upfront. ^
http://www.bloomberg.com/news/2011-04-08/airlines-credit-risk-increases-as-crude-surpasses-113-a-barrel.html?cmpid=yhoo
.
Credit default swaps (CDS) are somewhat like insurance against default on debt but they are also speculative instruments in that it is not necessary to own the debt for which you are seeking the CDS.
.
Although CDSs are not traded on public markets like many stocks are, the market for large corporations is fairly active and pricing is therefore fairly well known.
.
The pricing on AMR CDSs at 21 plus 5 means that essentially the market is betting on a 1 to 4 basis that AMR will default on its debt through some mechanism (of which filing for bankrutpcy is the most likely scenario).
As a basis for comparison, the final price of CDS on DAL debt was 18 prior to its bankruptcy while NWA's CDSs priced at 28.
.
To highlight the challenges facing AMR management, increases in the price of debt (which is related to credit worthiness - and CDSs do influence credit ratings) may increase the amount of collateral that has to be put up by AMR for jet fuel hedges... and most hedging activity is suspended when a company files for bankruptcy since hedging does involve risks which might involve placement of collateral, which creditors want to protect.
.
Further, AMR has financial obligations (debt payments, aircraft expenditures, and associated commitments) over the next two years that are similar in size to DL and UA/CO even though AMR is a smaller company. (Financial commitments can be found in the 10K annual filings made by each publicly traded company - found in the investor relations section of their websites). CDSs are explained in layman's terms on wikipedia.
.
Because CDS and maintaining hedges both involve market perception of risk, it might be increasingly difficult for AMR to obtain the funding necessary to avoid bankruptcy.
.
AA/AMR/AE employees would be well served to carefully follow AA/AMR's first quarter earnings conference call and the associated filings to look for management's tone about the current situation.
Unless there is significant confidence, anyone with a financial interest in AMR/AA/AE would do well to think about their financial plans and contingencies, esp. those that are in the bottom 15-20% of the seniority for a workgroup, base, or category.

Very interesting. But unfortunately EVERYONE at AMR is in DENIAL..........from the TOP to BOTTON.

 

[FWAAA]

How much would you like to wager that all this dire financial outlook will have ZERO effect on the upcoming executive PUP pay?

This "dire financial outlook" has zero effect on your paychecks this month . . . so why should this news have any effect on the executives' paychecks (from the PSP shares) this month?

AMR stock has to have been one of the poorest performers of the peer group during 2008-2010; so the objective formula in the contract will make this year's PSP payout one of the smallest. If AMR stock performed the worst of any of the peer group over the three years, then the executives will get zero from the PSP. If AMR is in next to last place, the executives will get 25% of their target shares from the PSP. I'm assuming that AMR stock has been the bottom or next to the bottom performer among the peer group. For the 2008-10 PSP, the peer group was expanded to 10, and consists of FL, AS, AA, CO, DL, B6, NW, WN, US and UA.

This dire news boils down to this: the bookies that sell insurance against bankruptcy are now charging 26% of face value in year one and 5% a year thereafter to insure AMR debt (bonds) against bankruptcy. With AMR stock selling for less than $6/sh, that shouldn't be any big surprise, as equity holders are predicting fairly good odds that AMR files a Ch 11 petition in the near future.

 

[damajagua]

Any idea how soon the filling might be? I think the sooner
the better.

 

[TWU informer]

Maybe after they file we will see a business being ran as if it wants to stay in business.

As for now, it appears a business willfully trying to reach bankruptcy.

Next week sounds good enough.

 

[WorldTraveler]

This "dire financial outlook" has zero effect on your paychecks this month . . . so why should this news have any effect on the executives' paychecks (from the PSP shares) this month?

AMR stock has to have been one of the poorest performers of the peer group during 2008-2010; so the objective formula in the contract will make this year's PSP payout one of the smallest. If AMR stock performed the worst of any of the peer group over the three years, then the executives will get zero from the PSP. If AMR is in next to last place, the executives will get 25% of their target shares from the PSP. I'm assuming that AMR stock has been the bottom or next to the bottom performer among the peer group. For the 2008-10 PSP, the peer group was expanded to 10, and consists of FL, AS, AA, CO, DL, B6, NW, WN, US and UA.

right on spot. I don't know the formula used for AA executive compensation but the chances are that most airline exec teams are not going to make a whole lot of money this year.... and given that there are generally some linkage of pay to industry peers, then if other airlines don't pay exec bonuses, then AMR will find it very hard to do the same.
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I didn't go through all of AMR's 10K filing w/ the SEC but it includes the executive contracts including SERPs (essentially bankruptcy proof additional retirement programs) for some personnel. Not sure what the details are but they are out there and will be raised as an issue by labor groups - if not legislators.
.
It is also likely that if AMR files for BK, the current management team will take the company through the BK process to be replaced at emergence or shortly before - but it is fairly typical that if a company is close to BK, there is not a change in mgmt teawms at this point. So, Arpey's legacy will likely be having led AA through BK and then overseeing its restructuring... not sure how prepared he and his current executive team are for that task.l

Any idea how soon the filling might be? I think the sooner
the better.

historically, airline bankruptcies occur in the late summer to early fall.... after the prime summer travel season has ended and when airlines can show sold tickets as flown revenue. After that point, bookings start to fall off fairly dramatically in the fall due to cessation of most leisure travel.

Maybe after they file we will see a business being ran as if it wants to stay in business.

As for now, it appears a business willfully trying to reach bankruptcy.

Next week sounds good enough.

again, fuel hedges typically have to be "unwound" when a company enters BK... so you don't want AA to have to go through BK as long as fuel prices continue to rise... AA does have a pretty good hedging portfolio and if it is unwound then AA would be forced to pay market prices for fuel- often on the spot market and not even under long-term contracts....
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I would also not argue that AA/AMR is intentionally trying to reach bankruptcy.. they have had many opportunities to file in the past and have not done so... but when your financial situation deteriorates, it becomes harder and harder to keep the ship sailing as is... and eventually you succomb to the forces around you - and part of that includes the speculators (people who have no direct financial interest in AA/AMR) that are betting against AA's ability to continue to operate outside of BK.
so, as long as this scenario has been setting up, holding out as long as the fuel hedges have some effect and/or until fuel prices start to decline is far better for insuring AA's ability to turnaround.

 

[Hopeful]

right on spot. I don't know the formula used for AA executive compensation but the chances are that most airline exec teams are not going to make a whole lot of money this year.... and given that there are generally some linkage of pay to industry peers, then if other airlines don't pay exec bonuses, then AMR will find it very hard to do the same.

Excuse me while I get my hankie out for our poor executives!

pay linkage to peers?

Why doesn't that philosophy apply to AA mechanics who are BELOW the mid range of our peers?

Why does the EXECUTIVE philosophy of "market demand" and "peer compensation" only apply to the suits?

 

[jersey777]

My concern is how a bankruptcy filing would affect me personally and the flight attendants in general. Does our future pay/benefits depend on what management asks for during bankruptcy proceedings? Or are they required to honor their last contract offer during the negotiations process just like they have to do following a 30 day cooling off period? And what about the pensions? I read there was a bill in congress that would forbid companies from using bankruptcy courts to gut pensions. If I looked really hard I would find the link.


What is a shame in this is that in 2004 American Airlines had all the employees in the palm of their hand. After we gave up so much to save the company, there was a real sense of "we are all in this together". AND then management squandered that trust with their bonuses.... it was American Airlines as usual.

Maybe the biggest loser in all this will be Gerard Arpey. For a company man of 30 odd years...a bankruptcy has to be the worst legacy an employee can leave. Not that I feel sorry for him. He proved to be an ineffective leader and we will all suffer for it.


I found the link. Not sure what happened to this bill after it got out of sub committee.

http://www.avstop.com/news_sept_2010/house_bill_hr_4766_is_a_win_for_airline_employees.htm

 

[jimntx]

There have been some changes to the bankruptcy laws offerins more protection for employees; however, I wouldn't count on a trip through Bk court to be good for any of us.

 

[Hopeful]

Maybe the biggest loser in all this will be Gerard Arpey. For a company man of 30 odd years...a bankruptcy has to be the worst legacy an employee can leave. Not that I feel sorry for him. He proved to be an ineffective leader and we will all suffer for it.

Nah.....In the finance world, AA has been criticized for not taking the BK route.....It is the honorable thing to do in the corporate world....Screw the employees, creditors and investors with promises of "leaner and meaner."
I say, let's go one better.....Do away with the Chapter 11 bankruptcy code and use strictly Chapter 7 and have everyone start over again....

 

[FWAAA]

My concern is how a bankruptcy filing would affect me personally and the flight attendants in general. Does our future pay/benefits depend on what management asks for during bankruptcy proceedings? Or are they required to honor their last contract offer during the negotiations process just like they have to do following a 30 day cooling off period? And what about the pensions? I read there was a bill in congress that would forbid companies from using bankruptcy courts to gut pensions. If I looked really hard I would find the link.

I wouldn't be too worried about the pensions. AA's pensions were 68% funded at 12/31/10 and since then, equity markets have recovered even more (which should help increase that percentage).

For those who think that percentage is dismal, compare Delta's funding percentage; at 12/31/10, DL's frozen pensions were funded at only 47%.

AA's 12/31/10 Accumulated Benefit Obligation was $11.5 billion and the plan assets were $7.773 billion, for a funding deficit of $3.735 billion.

DL's 12/31/10 Accumulated Benefit Obligation was $17.5 billion and the plan assets were just $8.25 billion, just a half billion more than at AA, for a funding deficit of $9.26 billion. DL's pension deficit is a staggering $5.5 billion larger than AA's deficit.

There's a lot of internet blather to the tune of "AA must terminate the pensions," usually from people who have no idea what they're talking about. DL went thru Ch 11, terminated its pilot pension and froze all others and yet its annual pension contributions are larger than AA's annual pension contributions. They have to be so they can chip away at that $9.26 billion funding deficit.

AA has a lot of problems. Its pensions are not among the primary problems. But not to worry: there will be no shortage of ignorant postings by various uninformed individuals arguing that the AA pensions must be terminated in order to save the company.

Maybe the biggest loser in all this will be Gerard Arpey. For a company man of 30 odd years...a bankruptcy has to be the worst legacy an employee can leave. Not that I feel sorry for him. He proved to be an ineffective leader and we will all suffer for it.

Ineffective? Depends on your point of view. He was part of the team that managed to slash employee wages in early 2003 yet didn't have to file Ch 11 to do it. Since 2002, AA has contributed nearly $3 billion to its pensions (counting 2011's contributions) and their funding deficit is a manageable number. He was part of the team that managed to slash airplane lease rates and other costs in early 2003, again without spending hundreds of millions on bankruptcy lawyers, accountants, investment bankers and other consultants. UA spent about two-thirds of a billion dollars on those parasites to get thru Ch 11. Arpey did it without spending that money. Of course, he didn't slash AA's employee wages as much as at US or UA, but AA employees should view that as a positive. Say what you will about Arpey - unlike most other CEOs, he truly believed that the pension promises made to employees must be upheld.

It would make sense to limit the DB pension plans to current employees and enroll all new employees in Defined Contribution plans, but that doesn't equal an immediate need to terminate/freeze the pensions for current employees.

If he were truly ineffective, the board would have replaced him by now. So far, the shareholders (who elect the board of directors) aren't as disenchanted with Arpey quite as much as the vocal employees. Of course, when Horton was promoted to President, I posted that it looked like Arpey's future with AA might be in jeopardy. I think this year's annual meeting could be the tipping point - but I wouldn't worry about Arpey - he's got enough nuts stored in the tree by now to get by.

 

[WorldTraveler]

If the question is whether AA could afford the pensions, then the answer is “no” they should not be at risk.
.
But companies and now governments have made it clear that they no longer want to assume the entire risk of paying someone’s retirement benefits decades in advance in a world where turbulence is the norm rather than the exception. Defined benefit (DB) plans have given way to defined contribution (DC) plans because companies want to be able to say they have given you what they said at the end of a year and know they have met their obligation. It then becomes your responsibility as an employee to invest that money – which is no longer controlled by the company – the way you see fit.
.
On the basis of the shift from DB to DC plans, it is not near as certain that AA will continue to keep its pension plans if it has a choice. A gradual phase out/grandfathering of existing employees in the current pension plans is possible but if they are given the choice of a freeze – which was received favorable well by legislators – I would bet AA would take it. Remember that AA and CO both repeatedly asked and Sen. Kay Bailey Hutchison which represents both CO and AA argued aggressively that AA and CO should get the same treatment that DL and NW got – but the answer was repeatedly that what DL and NW were allowed was because they were in BK and at the risk of default; the intention of allowing pension freezes was to prevent more plans being dumped on the PBGC who was very afraid that what happened w/ the steel industry was about ready to be repeated w/ the airlines.
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Remember also that DL’s funding requirements are different than AMR’s because DL’s plans are frozen. DL continues to pay on its pension plans on the time payment plan even though no additional employee benefits are being accumulated. DL retains control of the pension plans, employees still get the benefits promised under the plan just based on the frozen years of service. The PBGC avoided getting involved with the plans. The creditors did not have to share equity in the reorganized DL and NW (which emerged independently) with the PBGC which became a creditor in the UA and US bankruptcies because of the pension terminations. I’m not sure if the PBGC participated in DL’s C11 since DL did terminate the pilot pension plan because of the lump sum distribution features it contained, but which the NW pilot plan did not.
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Although everyone wants to know they have a guaranteed income coming for life, that is not realistic for most employers any more… and that will likely be one of the realities AA employees are going to have to accept in AA’s restructuring. It is also very possible that some people will do better managing their own money themselves than they could if the company managed it because some people, like myself, manage both more aggressively and with a willingness to diversify into more international/emerging as well as small cap or higher risk market investments which have done better than the larger domestic companies.
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It is mathematically correct, though, that AA’s problem is not its pensions. As has been discussed here before, it is also not AA salaries but rather productivity and the lack of growth at the company which serves to keep labor costs down since they will naturally rise as employees move up the salary scales and become heavier users of benefits such as health care.
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The real question then is what will AMR accomplish by going into BK if it does – and I would continue to note that it isn’t a given that they will if things turn around quickly which would have to include fairly dramatic reductions in TOTAL employee costs – which should be primarily obtained through productivity increases, some on the front end and some through promised growth – but with a notable decrease in total employee costs, benefits, headcount, and undoubtedly some paycuts just to give the company the breathing room necessary to get going again (and yes, I know AA employees did this in 2003 to no avail).
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Which brings us to the value of bankruptcy. The whole reason why AA’s employees gave so much w/ so little return in 2003 was because the company obtained only partial benefits from its out of court restructuring and they weren’t enough to lift the company to be able to take advantage of a pretty weakened industry in 2005 that still saw UA and US getting on their feet and DL and NW heading through BK. Chapter 11 BK was designed to give companies the opportunity to RESTRUCTURE with every financial stakeholder contributing – from the caterers to the debt holders to the employees. AA’s employees bore almost the entire brunt of the 2003 restructuring even though the company did not gain all of the needed benefits. In contrast, DL employees contributed about 1/3 of the total value of DL’s restructuring, partly helped by DL’s $4B in unsecured debt, DL’s fairly new M80s which were technologically obsolete when DL went into BK, and DL’s ability to redeploy a lot of int’l capable a/c that were flying domestic routes – all of which helped to reduce the “contribution” employees had to make. Also, DL focused more on increasing productivity through growth (related to the 767/777 redeployments) than salary cutting. But the notion that BK is bad is rooted in a moral argument that isn’t used by corporate America who understands there is risk in business and AA’s debt among other things is priced based on that risk.
.
So what should AA accomplish in BK?
1. Reject leases on as many M80s and 757s and 767s as possible, reprice the leases of aircraft that are kept based on the market, and shorten the time it will take to keep the older aircraft in the fleet.
2. Deal with AE… partly an old/wrong type of airplane problem.
3. Restructure debt.
4. Increase productivity of the workforce, bring health care and pension costs in line with the industry and similarly sized companies.
5. Restructure the network including (potential) partners as necessary to maximize revenue – although AA has done a pretty good job of adapting revenue to the changing environment; but they will have opportunity to reenter some old markets or potential new ones based on having lower costs.
6. And probably a whole lot more…

It is almost a given that AA will shrink in a restructuring; you can’t reject aircraft and find replacements overnight.
This could be a good time for AA to restructure given that UA/CO’s costs are going up as they integrate their two airlines and deal w/ demands from labor for improved pay and benefits. The whole economic environment will have an effect but UA’s costs are bound to go up as Arpey has predicted. If the cost situation is reversed with AA becoming the carrier w/ lower costs, AA is in a far better position to defend its markets and expand in UA dominated markets.
Let’s continue to hope that AA can restructure outside of BK where it is a lot less painful but it can only work if everyone participates.
But if you’ve gotta go in, do what has to be done, do it quickly, and then come out ready to aggressively compete – which is what AA has long been known as doing well.

 

[WorldTraveler]

deleted - dupe

 

[commavia]

Maybe after they file we will see a business being ran as if it wants to stay in business.

As opposed to all those other airlines who "want[ed] to stay in business" and thus used the bankruptcy "strategy" to achieve it, and in the process (among others):

- froze and/or dumped pensions
- outsourced heavy maintenance (in many cases to Korea, China, El Salvador, etc.)
- outsourced far more of their network to non-owned (and in many cases non-union) regional operators
- further reduced employee base pay
- further expanded work rule flexibility (more flying hours, longer haul flights, loosened work rules, etc.)
- laid off thousands of additional employees

Yes - you're right - that desire "to stay in business" would have been much better for AMR and its employees.

Looks like denial is still alive and well at AMR, where it seems the grass - for some - is still always greener.

Some things never change.