Distressed market shocked by AMR filing, unsecured bonds tank; Dynegy debt gains as CDS price

By Stephanie N. Rotondo

Portland, Ore., Nov. 29 - The distressed debt market was rocked by news out Tuesday that AMR Corp., the parent company of American Airlines, had filed for bankruptcy.

"I think it kind of caught everybody by surprise," an analyst said.

The last of the U.S. airlines to go into Chapter 11, AMR said it was doing so in order to deleverage and to cut costs. The bonds were trading actively on the news, but it depended upon where an issue was in the structure as to how much it was moved. Unsecured issues, for instance, took a "pretty good beating," the analyst said, while paper higher in the structure held in much better.

Meanwhile, buyers were circling for Dynegy Holdings LLC debt. The power producer's notes moved into higher territory after a credit default swap auction was held during the session.

Overall, a trader said the tone of the distressed market was "kind of unchanged, maybe a little weaker. There are still a lot of sellers around."

AMR unsecured debt nosedives

AMR, the parent company of American Airlines, announced it had filed for Chapter 11 protections Tuesday in an effort to shed debt and cut costs.

The airline is the last among U.S.-based airlines to file for bankruptcy after choosing to not file in 2009.

Depending upon where paper was within the capital structure, bonds were either down a few points or upwards of 10 points.

A trader said the 10½% notes due 2012 were the most active of the AMR issues. He noted that the debt fell "maybe 2 or 3" points to end around 90, versus previous levels in the low-90s.

The 7½% notes due 2016, however, were "for the most part unchanged, maybe down a point" around 76.

Unsecured issues, on the other hand, were getting hit hard. The 9% notes due 2012 were seen trading in a 16 to 20 range.

"They were around par a couple months ago," a trader said.

One analyst said the unsecured bonds took "a pretty good beating," falling to levels in the teens compared with previous levels in the 40s.

"It kind of caught everybody by surprise," the analyst said of the filing. "I don't think anybody expected it with their cash balance. They could have held on a little longer."

He speculated that the filing was a "strategic move" and that once through the bankruptcy process, the airline could "come out and be more competitive," following the lead set by other airlines like Delta and United. Both of those went through bankruptcy in 2009 and emerged a leaner machine.

"Unfortunately their cost structure with their unions is a little bit high," the analyst said.

Gimme Credit LLC analyst Vicki Bryan, however, 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 previous analyst, Bryan also opined that AMR's future remained bleak.

"It [sic] not even clear to us that AMR will ever reemerge 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 will also 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.

Dynegy rises with CDS auction

Dynegy Holdings' debt was on the rise as 13 credit default swap dealers gathered during the session to set the value of the bankrupt 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.

Exide powering down

A trader said Exide Technologies Inc.'s 8 5/8% notes due 2018 fell "another point" to end around 80.

"They've been coming down from the high-80s," he said.

There has not been any fresh news out on the battery maker since the company reported weak quarterly results in early November.

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