Analyst Was Early to See Possible Value in AMR Shares

CHARLOTTE, N.C. ( TheStreet) -- A Wall Street analyst said the run-up in shares in bankrupt AMR ( AAMRQ.PK)may have some validity after all.

Normally, outstanding common shares in a bankrupt company decline to zero and are cancelled on emergence from bankruptcy so that the company can issue new stock. But it is conceivable that an exception will occur in the case of AMR. Shares closed Friday at $1.60. Since Jan. 1, when they traded at 80 cents, the shares have doubled.

CRT Capital Group analyst Kevin Starke first wrote about the shares on Dec. 7, when they opened at 51 cents, saying in a report that an equity recovery "cannot be ruled out." His report may have contributed to the steep climb in the shares' value.

Starke wrote at the time that some of the members of an ad hoc bondholder group had "substantial holdings in the common stock" and might support a reorganization plan that benefitted equity holders and bondholders.

In a subsequent report on Dec. 14, Starke reiterated his views. He wrote again that the claims against American Airlines, which is also bankrupt, include a $2.4 billion intercompany claim by AMR, meaning that creditors with claims against both companies could be in for a "double dip" recovery. In a reported offer by US Airways ( LCC) to turn over 70% of AMR stock to creditors, those "double dip" creditors could be entitled to more than the $2.8 billion value of their claims -- which would be illegal. The excess, Starke wrote, could go to the equity holders; it would be worth around 80 cents a share.

Starke also described additional possible scenarios. One involves US Airways turning over 80% of the company to creditors, which Starke considers more likely than 70%, using a valuation based on an AMR standalone plan.With creditors getting 80%, "double dip" creditors would be entitled to $1.2 billion more than they can legally collect. In the unlikely event that money all flowed to equity, shares could be valued at $3.65 each. But Starke said that "this would be seen as even more egregious to single-dip creditors," and that a negotiated deal would likely result in a lower -- perhaps far lower -- valuation.

It is also possible, Starke wrote, that single-dip creditors could challenge AMR's claim against American Airlines, obviously a closely related company. But since the double-dip creditors also hold common stock, they "may have little reason to oppose the recovery to equity," he said.

Starke's report included a warning to buyers of AMR common shares. He noted: "Anyone buying a bankrupt equity should know that being at the bottom of the food chain is generally going to be a very high-risk bet, and maybe be better as an adjunct to a position in the bonds or trade claims."

Last week, in a regulatory filing of a letter to a U.S. Justice Department attorney, AMR bankruptcy attorney Harvey Miller appeared to lend a measure of support to Stark's analysis. In the letter, Miller said AMR has "made remarkable progress in stabilizing their businesses and improving their prospects.

"Depending upon the ultimate strategic alternative adopted and pursued, there exists a reasonable possibility that there may be value for AMR equity holders consistent with the absolute priority rule," he said.

Earlier, Miller opposed a request by an equity holder to allow a committee to represent equity holders. He said then that it was unlikely that equity holders would receive anything for their shares. But now, he said, a possibility exists.

For its part, AMR said in November that its shares would have little or no value when it emerges from bankruptcy. In last week's filing, AMR again cautioned against assuming that the shares will have value. It said that Miller's letter "was not prepared for the purpose of providing the basis for an investment decision."

-- Written by Ted Reed in Charlotte, N.C.

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