Air junk bonds? CreditSights tries to put a value on some unusual notes

American Airlines’ heavily overcollateralised airline bonds may be less secured than many investor believe, according to analysis published by CreditSights yesterday. See original report. The report, AMR: What is the Value of 150 Old Aircraft?, describes the AMR 10.5% 2012 notes as “unique in the annals of airline bonds”.

The securities are backed by 150 aircraft which, according to the bond’s official appraisal value, gives them a 44% loan-to-value ratio. Unusually, these appraisals are based on the market value of the aircraft, rather than a "base value" based on estimates of future cashflows.

In reality, according to CreditSights, the ageing aeroplanes that back the bond could not be used by any airline other than American and they have no market value other than their engines.

The report estimates the market value at 110% of the bond’s face value. However, stripping the engines out of 150 aircraft and selling them is somewhat impractical, especially for bond holders who have no engineering expertise. Never mind the fact that such a theoretical firesale would depress the market for jet engines, it would also leave the airline with a big hole in its fleet.

“The assets have economic value to AMR as long as they are used, but significantly less value in the hands of creditors,” note the authors. As a result, the key to the value of the bonds, which currently trade around 95 cents in the dollar, is the likely arbitrary value that the bankruptcy court puts on the aircraft.