NEW YORK (Reuters) - Holders of $450 million in American Airlines bonds plan to ask a U.S. bankruptcy judge for an order to help ensure they get paid, claiming that the 143 planes that are collateral for their investment could lose too much value.
The bondholders’ agent, U.S. Bank, is expected to argue at a Thursday hearing in U.S. Bankruptcy Court in Manhattan that the airline unit of AMR Corp AAMRQ.PK has neglected its planes, and failed to make hundreds of repairs.
They fear that this and other costs could force the value of the planes to sink too low to cover the bonds.
The value “will continue to erode as a result of the costs to insure, store, ferry, market and sell the aircraft,” U.S. Bank said in court papers.
Most of the planes are older-model aircraft, including Boeing 757s and MD-82s and MD-83s made by McDonnell Douglas. Payment on the bonds is due October 15.
Sean Collins, a spokesman for American Airlines, on Wednesday disputed the bank’s claim, saying there has been “no change in American Airlines’ maintenance policies and procedures that would impact the value of the aircraft.”
AMR declared bankruptcy last November and is unloading older portions of its aircraft fleet. The company has said it must save more than $1 billion in labor costs to become profitable.
The company on Tuesday issued notices to more than 11,000 workers, warning of possible layoffs as a result of its bankruptcy filing.
U.S. Bank is seeking to bolster safeguards for the bonds under bankruptcy rules designed to protect secured creditors from declines in the value of collateral.
It wants to file a top-priority bankruptcy claim to ensure bondholders are paid ahead of other creditors, to offset any decrease in value from AMR’s alleged delay in making nearly 500 repairs to cabins, engines and plane structures.
U.S. Bank believes it would fetch just $501 million - including $40 million of previously frozen cash collateral to which it seeks access - if it seized and sold the planes. That’s barely above the $491 million in principal and interest that it said bondholders are owed.
But AMR said in court papers that U.S. Bank’s request “borders on -- if not crosses the line of -- being frivolous.”
Collins on Wednesday added that U.S. Bank is “well aware the aircraft are being maintained in compliance with all applicable FAA regulations.”
A lawyer for U.S. Bank declined to comment.
U.S. Bankruptcy Judge Sean Lane denied a similar request on behalf of the bondholders in February, but said they could renew the request if circumstances changed.
In court papers, U.S. Bank justified its action, saying AMR recently missed a $36 million interest payment, and that many of the planes could be mothballed if the carrier merged with a healthier rival.
US Airways Group Inc LCC.N has moved aggressively to buy AMR, but AMR has said it would rather emerge from bankruptcy as an independent company before considering a merger.
The case is In re AMR Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463.
Reporting By Nick Brown; Editing by Jeffrey Benkoe and M.D. Golan