Market is 'underestimating' costs of a blocked US-AMR merger: banker

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The aviation market is "underestimating" the "magnificent cost" of a failed US Airways and American Airlines merger, says a banker.

"All the financing plans that were presented to partners, whether they were banks, lessors, hedge funds or other investors, are under review and will need to be dramatically revised if the merger falls through," he says.

"There are $1 billion in merger synergies at stake here, so you better believe the hedge funds are on their way back home from the Hamptons," says the source.

Those synergies - as set out by Doug Parker, chairman and chief executive of US Airways, and Tom Horton, chairman and chief executive of American parent AMR, during an investor call in February - are split between $900 million in network revenue synergies and $550 million in cost savings that are partially offset by $400 million in labour harmonisation expenses.

US investment bank JP Morgan also believes talks are underway about rewriting contracts.

"We suspect that AMR's advisors will pull the standalone plan off the shelf, dust it off, and ask dozens of managers, who were soon to be unemployed, to remove their resumés from sites like LinkedIn or in preparation for (perhaps if the litigation fails or is not pursued) a full-court press to convince investors that a standalone American is competitively viable over the long term," says the bank in a research report.

The banker source points to recent "favourable" aircraft financings by both carriers that were "likely influenced by a potential merger".

US Airways raised more than $3 billion in new debt financings in the second quarter, including $1.6 billion from a secured term loan in May and $820 million from an enhanced equipment trust certificates (EETC) financing in April that priced at a record low.

The $620 million class A notes carry a coupon of 3.950%, while the $199.5 million B notes have a coupon of 5.375%.

Meanwhile, just last month, American Airlines refinanced a EETC financing below 5%.

The 10-year class A notes priced at 4.95%. The deal refinances about $1.32 billion in outstanding debt on American's 8.625% 2009-1, 10.375% 2009-2 and 13% 2011-2 EETCs.

"Sure, we cannot say exactly how much pricing was positively influenced by the merger, but we do know with a great deal of certainty that merger talks did not hurt pricing," says the banker.

Another banking source agrees the merger has "definitely created a credit halo" for these airlines, but says timing was also a factor behind the "attractive pricing" achieved on these debt deals.

He points to American Airlines' $506.7 million A tranche, which was part of its $663 million EETC private placement in March, that came to market just weeks ahead of US Airways' $820 million EETC.

The A notes priced at 4%, slightly wider than US Airway's A tranche.

"This was a function of market execution and when the deal hit the market," he says. "The market had changed in a couple of weeks and to American's disadvantage, indicating timing had a lot to do with the favourable rates."

Additional reporting by Edward Russell