CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'BB-/Recovery Rating (RR) 1' to American Airlines, Inc.'s proposed senior secured credit facility. The ratings for American Airlines and its parent company AMR Corp. remain unchanged at 'D' while American remains under chapter 11 bankruptcy protection. A full list of ratings follows at the end of this release.
American Airlines is expected to enter into a new $2.5 billion senior secured exit credit facility. The facility will consist of a $1 billion five-year revolver and a $1.5 billion six-year term loan. The term loan is scheduled to amortize at 1% per annum with the remainder due at maturity. The proceeds are expected to be used to repay American's 10.5% secured notes, for the acquisition of aircraft and for general corporate purposes.
The $1.5 billion term loan will initially be structured as a Debtor-in-Possession (DIP) loan to be funded while American is in bankruptcy, and will feature an initial maturity of up to 1 year. While in bankruptcy, the term loan will have a priority administrative claim. Once American emerges from bankruptcy and completes the proposed merger with US Airways (assuming that the merger and exit from bankruptcy are contemporaneous as described in American's plan of reorganization), the DIP loan will then convert to a standard six-year senior secured term loan. Upon completion of the proposed merger, US Airways Group, Inc. and US Airways, Inc. will become additional guarantors under the facility. The revolving credit facility will not be available to American until the company exits from bankruptcy.
KEY RATING DRIVERS
The facility will be secured by a first priority interest in the slots, gates, and routes which represent American's entire South American franchise. American's route authorities and slots between the US and South American countries will be pledged as collateral, as will the gate leaseholds at foreign airports. Gate leaseholds at the domestic airports will not be pledged. The collateral package does not include AMR's Mexican and Central American assets.
In a going-concern scenario (which Fitch considers the most likely scenario), recovery values are supported by the underlying collateral's strategic importance to AMR. The company has a leading share of the US/South America market estimated at roughly 31% of total traffic. The Latin American region also generates the highest RASM (13.89 cents in 2012, up 3.8%) of any geographic region in the company, representing some of American's most profitable routes. (Note that these Latin America figures include Mexico and Central America, so they are not exactly representative of the results of the term loan's collateral package, although Fitch estimates that the collateral package is responsible for the bulk of the results in AMR's Latin America segment.) The Latin America region accounts for approximately one-fifth of AMR's total capacity (31.3 billion ASMs in 2012, up 4.4%), and the region generated $5.8 billion of revenues in 2012, up 6.5%. Fitch estimates that the region has been one of AMR's strongest growth contributors in the past several years. Given the relatively high growth, profitability, and competitive position, Fitch believes that the Latin American region accounts for a disproportionately high percentage of the company's enterprise value compared to its capacity percentage. Therefore, first lien holders would be expected to hold significant sway in any future reorganization.
The 'BB-/RR1' rating is supported by the expected recovery from the collateral securing the facility. Fitch's recovery analysis focuses on a 'going-concern' valuation in which distressed enterprise value (EV) is allocated to the various classes of debt in the company's capital structure. Fitch analyzed distressed EV in both a merger scenario and a stand-alone (no merger) scenario. In both scenarios Fitch applied a haircut to estimated EBITDA and then applied a distressed multiple to determine distressed EV. Both scenarios resulted in an estimated recovery of at least 91-100% to the entire credit facility (term loan and revolver), which equates to an 'RR1' rating under Fitch's recovery analysis criteria.
Although the underlying slots, gates, and routes are intangible assets and are inherently difficult to value, Fitch also conducted a discrete recovery analysis looking at the value of the collateral on a stand-alone basis. This analysis utilizes appraised values from a third party appraiser, and applies further haircuts to those appraised values. Fitch evaluated the low end of a range of appraised values and noted that the collateral package could withstand haircuts of more than 50% and first lien holders would be expected to receive 91-100% recovery. Fitch considered some of the appraiser's assumptions to be conservative, but did not have access to all of the supporting data, limiting the firm's ability to assess the reasonableness of the appraisal results. However, the appraised values were comparable to Fitch's own estimate of the collateral's proportional share of the estimated emergence EV.
Notching from IDR
Fitch's recovery and notching criteria stipulates that issue ratings be notched up or down from the underlying issuer IDR based on recovery prospects. However, while American remains in bankruptcy protection and its IDR is 'D', Fitch does not believe that notching from the IDR (which would equate to rating of 'CCC-'), accurately reflects the true credit quality of the facility. Therefore Fitch has taken the conservative approach of notching up three notches from 'B-', which is considered the lowest potential IDR for American after its emergence from bankruptcy. Given the recent improvements in American's profitability, the company's improved debt structure, reduced concern around labor issues, and the expected benefits from the proposed merger with US Airways, Fitch could assign an IDR that is higher than 'B-' upon completion of a full review once the company exits from bankruptcy. In that case the credit facility ratings would be upgraded to reflect a three notch uplift from the assigned IDR.
RATING SENSITIVITIES
The term loan is supported by a priority administrative claim while American remains in bankruptcy. Once American exits bankruptcy, it is unlikely that Fitch will assign an IDR lower than 'B-'. Therefore a downgrade is unlikely in the near term. Conversely, since the facility rating is tied to the airline IDR, the rating could be upgraded if Fitch assigns a post-emergence IDR that is higher than 'B-'. Also, any deterioration in the value of the collateral could affect the recovery rating, and therefore the notching from the IDR.
Fitch has assigned the following rating:
American Airlines, Inc.
--Senior Secured Credit Facility 'BB-'.
Fitch Rates American Airlines as follows:
AMR Corp.
--IDR at 'D'
American Airlines, Inc.
--IDR at 'D'
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012)
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793053
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