American Airlines seeking a break on terms of $435 million loan

June 25, 2009
Company wants relief on requirement that cash flow be a certain percentage of its fixed charges of interest and rentals


Jun. 25--American Airlines Inc. should learn today if lenders will give it a break on a $435 million loan.

Debtwire and Bloomberg News have reported that American, with the assistance of Citigroup Inc., is again asking its lenders to relax the terms of a $435 million loan due Dec. 17, 2010, to make it easier to meet loan covenants.

An American spokesman declined to comment on the reports.

The carrier and parent AMR Corp. reportedly want relief on a requirement that American's cash flow be a certain percentage of its fixed charges of interest and rentals.

In May 2008, American persuaded lenders to lower the ratio of cash flow before interest, taxes, amortization, deprecation and rentals to fixed charges, including interest paid and rentals such as lease payments.

However, that waiver required American to meet new, lowered ratios beginning in the second quarter of 2009, which ends Tuesday, and in subsequent quarters.

American and many other airlines are struggling with continuing losses from rising fuel prices in 2008 and plummeting demand, particularly among business travelers, in 2009. They're also coping with a recent doubling of energy prices from lows of last winter, although jet fuel prices are still well below last July's highs.

The summer months are typically the airline industry's most profitable part of the year, but that isn't helping airlines this year, analysts noted Wednesday.

"That goes a long way to indicating how deep the airlines' problems are right now, that it's impossible to even meet a lower fixed-coverage bar in a seasonably strong quarter," Fitch Ratings analyst Bill Warlick said Wednesday.

Since the beginning of 2008, AMR has reported net losses of more than $2.4 billion, with third quarter 2008's net income of $45 million the only profitable quarter during that period.

AMR advised investors last week that it expects to have $2.8 billion in unrestricted cash and short-term investments and $460 million in restricted funds at the end of the second quarter June 30, relatively unchanged from the first quarter.

Those amounts are down from $5.1 billion in unrestricted cash and short-term investments, plus $434 million in restricted funds, that AMR had available on June 30, 2008.

Warlick said that if American were unable to negotiate a solution, the lenders could call the loan and force American to repay. However, "banks aren't keen to accelerate the loan or force repayment," he said.

CreditSights analyst Roger King said an early repayment may not be what American wants to do as it seeks to preserve liquidity, but it has the cash and short-term investments on hand to repay the loan if forced.

For that reason, "I don't think it's going to be a big deal," King said. "I don't consider it to be a problem because the company isn't backed into a corner."