JP Morgan’s Streeter Talks About Breaking Covenants, Not Guitars


Had to chuckle this morning when I read the JP Morgan Equity/Debt review of American Airlines’ earnings release.

As most of you know, Jamie Baker is the equity analyst for JP Morgan, but Mark Streeter handles the debt side.

Mark’s snarky side came out today in his headline as he wrote in the note,

Some Airlines Bust Guitars, Some Also Bust Covenants – We have been worried for some time that airlines (AMR, LCC & UAUA, more so than others) could violate bank debt covenants later this year or early next year if industry conditions don’t suddenly improve. AMR likely shared this concern as the company last month sought and received fixed charge coverage relief from banks. Specifically, the AMR bank debt fixed charge coverage ratio for the June 2009 quarter was waived. Going forward, the ratio remains at 0.95x for the September 2009 quarter (no change) but stays at that levels through year-end (i.e. lower threshold) with reduced step-ups through September 2010 as well. While our more bearish-than-consensus revenue forecast continues to show AMR tight (if not busting) covenants during 2H09 (along with others), additional bank relief remains achievable, in our view.”

As for the all-so-important liquidity question, the duo commented,

AMR’s Liquidity Pantry Is Still Fairly Well Stocked – Unlike the pantry at USAirways, which we consider bare, and the pantry at United, which is stocked with canned goods long past their expiration date (i.e. older aircraft and parts that are very tough to finance), AMR boasts of $3.7 billion in unencumbered asset provisions, real liquidity flexibility, in our opinion (with the untapped AAdvantage forward mileage sale the most obvious component). Now, not all of the contributing assets to this estimate are readily-financeable (such as AMR’s ownership of Eagle) but at least $2-$2.5 billion represents real liquidity flexibility in our opinion. Furthermore, $500 million of additional assets will become unencumbered later this year (including some not-too-old-to-refinance aircraft falling out of maturing EETCs). The bottom line is that USAirways and United are at or past V1 in their burn-the-furniture liquidity takeoff rolls, in our view, while AMR is just now nudging its throttles forward, with still-adequate runway remaining. Boiled down, we remain of the view that Chapter 11 can be averted at AMR.”