AMR dives after bankruptcy filing; other airlines unseen; market mixed; primary stilled

By Paul Deckelman and Paul A. Harris

New York, Nov. 29 -AMR Corp.'s bonds were seen losing altitude on Tuesday after the airline giant made an emergency landing in Chapter 11, becoming the latest U.S.-flag air carrier to seek protection from its bondholders and other creditors.

While AMR was down at least a few points - and its unsecured paper plunged more than 50 points versus recent levels - bonds of other airline companies, including Delta Airlines, Inc. and United Continental Holdings, Inc., were little seen.

Traders did not see much happening outside of AMR's wild gyrations at mostly lower levels. They said the market was mixed, generically speaking.

However, one non-airline name that did stand out was Dynegy Holdings, Inc.

The power generating company's debt firmed after a credit-default swap auction was held during the session.

Primaryside players, meantime, stifled their yawns, with no new-deal activity of any sort reported on the radar screen.

AMR bankruptcy moves bonds

A trader said that AMR's bonds were down by as much as 50 to 60 points following the news that the Fort Worth, Texas-based airline giant filed for bankruptcy protection.

He saw its 9% notes due 2012 trading as low as 15 bid, calling the notes down 58 points from where they were, which was in the low- to mid-70s the last time they traded.

While there was a lot of activity in the credit, a market source pointed out, almost all of it was in smallish odd-lot trades. There were only a handful of trades in any kind of real size - and no recent round-lot trades against which they could be compared.

He said the bonds initially opened at 16 bid, down 56 points from prior levels. The bonds got as low as 10 bid during the session, but then recovered a little to go home at 21 bid.

Apart from that unsecured issue, the first trader said that the American Airlines parent company's other bonds "were all down a couple of points," depending upon what issue was being quoted.

He saw the American Airlines 10½% notes due 2012 as the most active with well over $20 million having changed hands through mid-afternoon. He pegged the bonds down 1½ points, last trading around 90 bid.

AMR's 10 3/8% notes due 2019 were down 2½ points, last trading at 100½ bid.

The company's 5¼% notes due 2021 were pretty much unchanged from week-ago levels, finishing at 88¾ bid.

The trader said that "a lot of the attention was focused on [AMR], aside from bits and pieces here and there on other names."

Another trader added: "AMR was on a wild ride."

He said it was difficult to peg where the debt was overall, except to say it was lower because "it was really dependent on what you had in the way of collateral and where you were in the capital structure in terms of what happened to you today."

He said that "stuff was down as much as 30 points or more," referring to unsecured notes, convertible notes and paper collateralized by liens on the airline's older and hence, less desirable or valuable aircraft manufactured by McDonnell Douglas before it was merged into larger rival Boeing Co.

"Other stuff was unchanged to up. So it really depended upon issue, in terms of what the reaction was to the news," he said.

"But it was definitely volatile and a good amount of activity, no question about that," the trader added.

A surprise - or maybe not

AMR is the last among U.S.-based airlines, at least in the high-yield space, to file for bankruptcy. It chose not to file in 2009.

In the 10 years since the tragic events of September 11, which caused major disruptions to air travel and drastically increased security and insurance cost for carriers, a parade of American's rivals flew into and out of the bankruptcy courts, including United Air Lines, TWA, US Airways, Delta Air Lines and Northwest Airlines.

When the airlines reorganized, they managed to shed burdensome labor contracts and debt, emerging with more financial flexibility than the carriers that had not availed themselves of the bankruptcy route, including AMR, until now. Investment-grade rated carriers, such as Southwest Airlines and JetBlue, also never filed for bankruptcy.

Upon emerging, many of the formerly bankrupt carriers ended their tenure as independent airlines by combining with rivals. United combined with Continental Airlines, which went bankrupt twice in the 1980s and again in the 1990s. Delta combined with Northwest, and TWA combined with American.

Analysts and other airline-watchers had long speculated that AMR would have to turn to bankruptcy sooner or later.

One analyst did say the timing of AMR's move "kind of caught everybody by surprise."

"I don't think anybody expected it with their cash balance. They could have held on a little longer," the analyst said.

Having said that, he speculated that the filing was a "strategic move." After emerging from the bankruptcy, the airline could "come out and be more competitive," the analyst said. That follows the example set by Delta, United and the others that went through bankruptcy in 2009 and emerged as a leaner machine.

In American's case, the analyst cautioned that "unfortunately their cost structure with their unions is a little bit high."

On the other hand, Gimme Credit LLC analyst Vicki Bryan was not at all surprised by the news. In an afternoon report, Bryan noted that the independent agency had predicted a bankruptcy filing by Christmas.

"AMR's options have been rapidly depleted, like its thin unrestricted cash balance, and we also have projected that operations would burn cash at an accelerated rate going forward as fading fares slow revenue growth while already insupportably high operating costs - mostly fuel - continued to rise," she wrote in the report.

And unlike the other analyst, Bryan also opined that AMR's future remained bleak.

"[It's] not even clear to us that AMR will ever re-emerge from bankruptcy as a going concern," she said in the report. "The industry is chronically oversupplied and AMR has no dominance or significant competitive edge in any particular market - we are not convinced that a reinvented, scaled down iteration will change that."

And in fact, Bryan raises a good point. Already, there is talk that AMR could wind up merging with U.S. Airways.

The bankruptcy also will likely have negative repercussions for bondholders. Fitch Ratings said in a statement Tuesday that unsecured debtholders may get "next to nothing" for their investment.

Fitch, along with other ratings agencies, downgraded the airline after the news.

Other airlines little moved

Traders saw little or no spillover from the AMR news to the bonds of other air carriers, including Delta Air Lines. A trader said only 200 bonds, or $200,000, of Atlanta-based Delta's paper traded, hardly a representative amount.

He likewise saw little or nothing doing in United Continental's pre-merger Continental Airlines debt.

A second trader said that both of those names were "basically unchanged on the day."

Non-AMR market calmed

Away from big mover AMR, a trader said not too much was going on.

One of the few bonds he saw doing anything was Parsippany, N.J.-based car-rental giant Avis Budget Group's 8¼% notes due 2019. He said it was up 4 points on the day, at 100½ bid.

He also saw some trading, though not a lot, in Camp Hill, Pa.-based drugstore operator Rite Aid Corp.'s bonds.

The trader said that there was not much of any one issue trading. "Just $1 million or $2 million, so one of them was up a point, another was down a quarter. So maybe unchanged to up a quarter [point] overall," the trader said.

"This was one of those exciting days," the trader said ironically. "We even saw locked markets out there of $3 million to $5 million bonds. That's how bored people were. They just couldn't get things done today."

"In the traditional 'go-go' names, you'd see a half-point market. Then a half hour later, it would be a quarter-point market, and then it would be locked and no one would budge," the trader said.

"Just one of those fun days," he added.

Market indicators are mixed

Among the statistical measures of market performance, things were mixed on Tuesday after a clearly more bullish day on Monday, the first in a number of sessions.

A trader saw the CDX North American series 17 High Yield index up ¼ point Tuesday to end at 89 bid, 89¼ offered, after having jumped by 1¼ points on Monday.

The KDP High Yield Daily index lost 3 basis points Tuesday to finish at 70.75, after having risen by 16 bps on Monday.

Its yield was unchanged at 7.99% after having declined by 4 bps on Monday.

The widely followed Merrill Lynch High Yield Master II Index lost 0.069% on Tuesday, after having gained 0.308% on Monday.

That loss dropped the index's year-to-date return to 1.358% on Tuesday from Monday's 1.428%.

The year-to-date return remains below its recent peak level of 4.28%, recorded on Oct. 28, and is well below its high-water mark for the year of 6.362%, which was set on July 26.

However, it is still well up from its 2011 low point, a 3.998% deficit recorded Oct. 4.

For a second straight session, junk dawdled while stocks were higher.

Although unlike Monday when they surged explosively, equities on Tuesday only were up modestly.

The bellwether Dow Jones Industrial Average, which on Monday had zoomed by 291 points, added on 32.62 points Tuesday, or 0.28%, to end at 11,555.63. The S&P 500 rose by 0.22%, although the Nasdaq index eased by 0.47%.

Dynegy rises with CDS auction

Elsewhere, Dynegy Holdings' debt was on the rise as 13 credit default swap dealers gathered during the session to set the value of the bankrupt Houston-based power producer's debt.

A trader said there were buyers for paper around, helping the 8 3/8% notes due 2016 move up 3 points to 73. The 7¾% notes due 2019 were pegged at 711/2, up 1½ points.

Another market source called the 7¾% notes up 2½ points at 72 bid.

Citigroup Inc. reportedly made the highest offer of 72, beating Royal Bank of Scotland Group plc's bid of 31½ cents on the dollar. RBS, for its part, was smacked with a $1.9 million penalty for coming in with a below-market price.

The initial market midpoint was 69½ cents on the dollar, according to CreditFixings.com.

Primary market quiet

The post-Thanksgiving primary market posted no new issuance on Tuesday.

The remainder of the week should remain generally quiet, sources on both the buyside and sellside said.

One reason is the Bank of America Merrill Lynch leveraged finance conference scheduled to take place Wednesday through Friday.

It is conceivable that a drive-by deal could materialize during the course of that conference, a buyside source said.

However, the conference is not the only reason things are apt to remain generally quiet in the primary market for the remainder of the week and for the remainder of 2011, according to a portfolio manager from a high-yield mutual fund.

Difficult market to price

"Right now people are basically at zero on the year and more or less willing to call it a wash," the manager said.

"People are wishing the year was over," the buysider added.

The main reason for the quiet primary market is the exceptional difficulty in pricing deals, the manager remarked.

Recently minted issues are a mixed bag.

Community Health Systems, Inc.'s 8% senior notes due Nov. 15, 2019 are trading in the 96s, the manager said. The notes came at par in a $1 billion issue that priced on Nov. 14, the investor said.

Peabody Energy Corp.'s 6% notes due in 2018 and its 6¼% notes due in 2021 both are straddling par, where they priced in tranches sized at $1.6 billion and $1.5 billion, respectively, in a $3.1 billion megadeal done on Nov. 7.

"Lately you haven't sunk your teeth into anything and made money," the investor lamented.

Redemptions: Take caution

Another force mitigating a vigorous primary market is the flow of cash in to and out of the high-yield asset class, sources said.

Although flows were slightly positive on Monday, according to the high-yield portfolio manager, they were intensely negative in the week before Thanksgiving when high-yield mutual funds sustained a whopping $2.17 billion of outflows, according to a report by Lipper-AMG.

"That has people on their heels," the portfolio manager maintained.

"Remember, there are probably only three weeks of actual market activity remaining in the year.

"And as you head into year-end people are bound to be nervous about the overall redemption environment," the manager added.

Slow ahead in the primary

The forward calendar ended the Tuesday session where it began, with just one deal on the road.

Optima Specialty Steel, Inc. is expected to end the roadshow for its $200 million offering of six-year senior secured notes (/B/) on Wednesday.

No price talk on the Jefferies-led deal was available at Tuesday's close.

Jefferies also is the lead on Landry's Inc.'s $90 million add-on to its 11 5/8% senior secured notes due Dec. 1, 2015.

The bookrunner has thus far refrained from announcing the timing of the tap; however on Tuesday an investor expressed the belief that the deal could come with "an 11% handle" before the end of the week.

Meanwhile on Tuesday, Landry's launched a $50 million add-on term loan on with an original issue discount price of 971/2. Pricing on the loan is the same as the existing term loan - Libor plus 450 basis points with a 1.75% Libor floor.

Jefferies and Wells Fargo are the leads on the bank deal.

Beyond Optima and Landry's, there is uncertainty in the new-issue market, sources said.

One syndicate official professed visibility on a possible five deals that could come before the end of the year.

Those, in conjunction with deals known to be waiting on the sidelines for favorable market conditions, might amount to as few as 12 deals total during the remainder of 2011, the official added.

A banker from a different syndicate concurred with that estimate and suggested that there is likely only two more active weeks remaining in the primary market this year, as opposed to the three remaining active weeks that the other buysider foresees.

"Rates moved significantly last week," the banker said.

"Some of the big drive-by deals that people were expecting are now behind their bogeys, making it much less likely that they will come before the end of the year."

It is conceivable that in the run-up to 2012, one or two "ultra-familiar" issuers could turn up with drive-bys," the sellsider said.

However, even those familiar credits - should they elect to come - will pay concessions to market conditions that have backed up since early November.

Stephanie N. Rotondo contributed to this report

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