The Deal: AMR Secures Plan Confirmation at Last

NEW YORK ( TheStreet) -- AMR Corp. ( AAMRQ) has passed its final bankruptcy test and now can look ahead to a Nov. 25 antitrust trial with the Department of Justice.

Judge Sean H. Lane of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan on Thursday, Sept. 12, conditionally confirmed the plan, centered on an $11 billion merger of AMR and US Airways Group ( LCC).

AMR was originally set for an Aug. 15 confirmation hearing before the DOJ filed its suit against the merger on Aug. 13, causing Lane to postpone the hearing to Aug. 29 and then Sept. 12 while determining whether to confirm the plan.

"There can be no dispute that the plan is feasible if the merger is allowed to proceed," Lane said. "The real issue here is whether the pendency of the DOJ lawsuit acts as a separate bar to feasibility, and the court concludes that it does not."

The DOJ was joined in its action Aug. 13 by attorneys general from six states and the District of Columbia. The government plaintiffs asserted the merger, which would form the world's largest airline, would substantially lessen competition for commercial air travel in local markets throughout the U.S. and result in passengers paying higher airfares and fees for ancillary services while receiving less service overall.

Lane noted the DOJ filed a notice on Aug. 23 that said despite the suit, the agency did not object to confirmation.

"The court agrees that the processes can and should proceed concurrently," Lane said. "Is there a benefit to act now? The court concludes that there is."

In a Thursday statement, AMR spokesman Mike Trevino said: "The judge's ruling today shows that American is heading in the right direction. This is yet another important milestone in completing one of the most successful turnarounds in commercial aviation. We are focused on the antitrust case and will show that our planned merger with US Airways is good for consumers and competition."

Lane, meanwhile, rejected a section of the plan that would have given AMR CEO Tom Horton a $19.88 million severance payment, calling it "impermissible under the Bankruptcy Code."

U.S. Trustee Tracy Hope Davis had objected to the plan based on the Horton payment.

"All the hard work Mr. Horton did was his job, as the CEO of an international airline now in bankruptcy," Davis counsel Susan Golden said at the Aug. 15 hearing. "If he didn't do his best to work hard and maximize the value of this estate, it would have been a breach of duty."

Debtor counsel Stephen Karotkin of Weil, Gotshal & Manges LLP said Horton had agreed not to fight the ruling if Lane rejected the payment. Karotkin said the debtor would revise the plan at a Sept. 18 board of directors meeting to remove the severance payment. A Thursday statement from AMR said Horton "feels that any delay or uncertainty places a further burden" on all parties involved with the plan.

Under AMR's reorganization plan, first filed April 15, secured creditors would be paid in full in cash, with the sale proceeds of their collateral or with the return of the collateral securing their claims. Secured claims include $6.78 billion in secured aircraft claims and $3.47 billion in other secured claims.

Priority claims ($356.7 million) and administrative claims ($290.4 million) would be paid in full on the effective date. Priority tax claims would be paid in full within five years.

Unsecured creditors would receive a pro rata share of new mandatorily convertible preferred stock. AMR owes an estimated $967.13 million in unsecured claims and $700,000 in other general unsecured claims, unit American Airlines Inc. owes $1.97 billion, and unit AMR Eagle Holding Corp. has $20.2 million in unsecured claims.

Convenience claims against AMR Eagle ($2.5 million) and American Airlines ($7.5 million) would be paid in full.

US Airways shareholders would get one share of common stock in the new airline at 1 cent per share for each of their shares, for a total of 28% of the diluted equity interests in the new company.

The remaining 72% would be distributable to unsecured creditors, labor unions, certain employees and holders of AMR equity interests. The U.S. Airline Pilots Association would get 13.5% of new common stock, the Transport Workers Union of America AFL-CIO would get 4.8%, and the Association of Flight Attendants would get 3%. The unions are owed $1.72 billion.

All of the unions have issued statements critical of the DOJ and supporting the merger.

AMR would fund the plan with $3.25 billion in exit financing that would be secured by slots, gates and route authorities that are used to operate nonstop scheduled air carrier services between the U.S. and South America, Mexico and Central America. AMR on May 31 filed the financing motions under seal.

Lane on May 9 authorized AMR to obtain a $2.25 billion exit term loan and a $1 billion exit revolver. The term loan will be available to AMR during its bankruptcy but will convert to an exit facility on the debtor's emergence from Chapter 11. The revolver will only be available on the airline's bankruptcy exit.

Lane approved the disclosure statement for the plan on June 4.

AMR was the only major U.S. airline that had not sought Chapter 11 protection until Nov. 29, 2011, when it filed its petition. AMR blamed its bankruptcy on weak financial performance since 2009, which has left the Fort Worth company behind its major rivals, many of which restructured and emerged from bankruptcy before 2009.

AMR was hurt further by an uncertain economic outlook, volatile fuel prices, an uncompetitive cost structure and a diminishing financial condition, which had been the subject of industry analyst reports and the cause of speculation about a possible bankruptcy filing.

Thomas A. Roberts, Glenn D. West and Alfredo Pérez of Weil Gotshal are also debtor counsel.

Jones Day's Joe Sims and J. Bruce McDonald, Paul Hastings LLP's MJ Moltenbrey, Debevoise & Plimpton LLP and K&L Gates LLP are AMR's legal advisers. Rothschild's Christopher Lawrence, Homer Parkhill, Yusik Choi and Matt Chou are the airline's financial advisers.

Sims is representing AMR in the DOJ lawsuit.

A Barclays plc team including Josh Connor, Ben Metzger, Kristin Healy and Larry Hamdan joined with Jim Millstein of Millstein & Co. LLC to serve as financial advisers to US Airways. Latham & Watkins LLP's Peter F. Kerman, O'Melveny & Myers LLP, Cadwalader, Wickersham & Taft LLP and Dechert LLP's Paul T. Denis, Gorav Jindal and Rani Habash provide legal counsel to US Air.

O'Melveny antitrust litigator Richard Parker, a former director of the competition bureau at the Federal Trade Commission, is representing the airline in the DOJ lawsuit, along with Dechert's Denis.

A Skadden, Arps, Slate, Meagher & Flom LLP team led by John Butler and Jay Goffman, working with Togut, Segal & Segal LLP, are counsel to the official committee of unsecured creditors. Moelis & Co. LLC's William Derrough, Gregg Polle and Zul Jamal, along with Mesirow Financial Holdings Inc., are financial advisers to the committee.

Gerard Uzzi and Tom Janson of Milbank, Tweed, Hadley & McCloy LLP and Eric Siegert of Houlihan Lokey Inc. represent an ad hoc committee of AMR creditors that signed a plan support agreement.

Seabury Group LLC and Amy Caton of Kramer Levin Naftalis & Frankel LLP represent Bank of New York Mellon Corp. and Law Debenture Trust Co. of New York LLC as indenture trustees in connection with the merger negotiations.

-- Written by Pat Holohan in New York

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