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American Airlines Merger to Aid Citigroup Credit Card Risk

NEW YORK (TheStreet) - The planned $11 billion merger between US Airways (LCC) and American (AAMRQ.PK) won't just impact investors in the shares and bonds of both airlines.

The deal, which would create the world's largest airline, surpassing United Continental (UAL), may also benefit Citigroup (C) and the billions it holds in credit card receivables from the still-bankrupt American's AAdvantage card.

The connection hinges on Citibank Credit Card Issuance Trust (CCCIT), which holds about $54 billion in receivables, of which roughly $13 billion are tied to the American Airlines AAdvantage card.

Citigroup and the credit card trust have noted in recent Securities and Exchange Commission filings that the pending resolution of American Airlines bankruptcy process leaves material risks to the operations and financial condition of the AAdvantage card piece of the trust, which represents about 24% of its $53.8 billion in receivables outstanding.

The merger with US Airways could eliminate much of the AAdvantage risk tied to the trust, according to ratings agency Moody's, potentially benefiting the credit quality of the CCCIT asset-backed security and its overall risk for Citigroup.

"What earlier looked like a negative credit factor has become positive," writes Moody's analyst Gregory Gemson, in a Thursday note to clients.

"[The] recent announcement of a merger between American Airlines' parent, AMR Corporation and US Airways Group is credit positive for CCCIT's asset-backed note issuance because the merger removes uncertainty about AA's ability to continue operating, thus maintaining the value and utility of the AAdvantage credit cards linked to CCCIT."

Were the merger to go through, however, some question marks remain.

Notably, the Citigroup-run AAdvantage plan may be merged with US Airways own credit card program, run by Barclays (BCS), changing the mix of securities contained in the trust. "A merger between the two air mile programs is likely at some point after the merger between the two airlines has been finalized later this year," writes Gemson.

For Citigroup itself, a clean resolution to American Airlines bankruptcy may minimize some risk from the bank's credit card portfolio. Citigroup states to its creditors that the Citibank Credit Card Master Trust has outstanding securities totaling $21.8 billion as of Jan. 31.

The company also disclosed American Airline-based credit card receivables in its most recent quarterly filing with the SEC.

"To date, the ongoing AMR bankruptcy has not had a material impact on the results of operations for U.S. Citi-branded cards, NA RCB, Citicorp or Citi as a whole. However, it is not certain what the outcome of the bankruptcy process will be or whether the impact could be material to the results of operations or financial condition of U.S. Citi-branded cards over time," Citigroup said in a 10-Q filing for the third quarter of 2012.

CCCIT is a part of Citigroup's North American Consumer Bank, the firm's largest banking business globally, meaning an improving risk profile to the trust could be a benefit to the bank's overall creditworthiness.

Such a scenario would come at an opportune time for Citigroup. In March, the bank will face Federal Reserve administered stress tests, which will decide whether it can improve on a 1-cent a quarter dividend, or buy back shares.

Last March, Citigroup failed its 2012 stress test after then-chief executive Vikram Pandit's plan to return capital to investors was rejected by the Fed.

While the successful exit of American Airlines from bankruptcy and the potential repayment of all creditors could be a positive for the airline, risks such as an antitust review remain in its proposed merger with US Airways.

-- Written by Antoine Gara in New York

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