, the American Airlines parent that teetered on the edge of bankruptcy four months ago, now says business is so good that it scrapped a plan to sell $250 million in convertible notes. Some balky comments from a rating agency probably didn't help.
The company originally planned to use the proceeds from the sale to fund ongoing business operations, joining the rest of the airline industry in selling debt to keep business rolling along. But the plan was scrapped a day after it was announced, because AMR said business was strong enough in early summer that the deal made less sense.
"With the significant improvement we have seen in AMR's operating results beginning in May, and with our strong cash balance of more than $2.7 billion, we felt it made no sense to proceed with this transaction in market conditions as they evolved today, and which are at odds with the growing improvement of the company," said AMR CFO Jeffrey Campbell in a statement Monday evening.
Market conditions were indeed tough for AMR's planned debt sale. At midday Monday, Standard & Poor's gave the proposed sale a CCC rating, which is two rungs below American's corporate credit rating of B-minus. The S&P said the offering places unsecured creditors, such as equity holders, "in an effectively subordinated position."
The news of the convertible flip-flop comes just one day after AMR announced solid results for the month of July, and three weeks after the company's second quarter beat Wall Street estimates. AMR said that July load factor, or the percentage of seats filled on every flight, jumped to 81% in the month, up from 75.7% in July 2002. And while the company cut capacity by nearly 7% from year-ago levels, traffic was off just 0.4% from July 2002.
AMR shares sold off heavily on Monday, dropping 91 cents, or 10.2%, to $8.04 on the news of the convertible notes offering, which would have diluted earnings and might have prompted arbitrageurs to short the common stock. But for the time being, investors don't need to be concerned about its liquidity position. When rating the planned bond sale, S&P said AMR didn't have a pressing need to add to its cash position, barring some shock to the airline industry, like a terrorist attack.
"AMR and American were upgraded to current levels June 20, based on expected earnings and cash flow improvement as a result of the April 2003 cost-saving agreements with labor groups," said Philip Baggaley, an S&P debt analyst, in a research report.
"AMR remains highly leveraged and vulnerable to any further airline industry revenue deterioration," he continued, "but near-term liquidity is adequate, with about $2.1 billion of unrestricted cash."