American Airline's bankruptcy leaves muni bond investors holding the bag

Few may feel more pain from AMR Corp. (AMR)'s bankruptcy than owners of $49.5 million in unsecured municipal bonds, due to be paid today and guaranteed by American Airlines. The bonds, which traded at 99.7 cents on the dollar as recently as Nov. 15, tumbled to 16.5 cents following AMR's bankruptcy yesterday, for a loss of as much as 83 percent. Alliance Airport Authority Inc. sold $125.7 million of the debt in 1991 to build an engineering and maintenance base for American in Fort Worth, Texas, the airline's home town. MacKay Shields, an investment unit of New York Life Insurance Co., reported holding $4.2 million of the debt on Sept. 30. “That's painful -- they missed it by two days,” said Matt Dalton, who oversees $925 million of municipal securities as chief executive officer of Belle Haven Investments Inc. in White Plains, New York. “American had a fair amount of debt that was due on Dec. 1, plus interest payments on other maturities.” Among its $29.6 billion in liabilities, AMR and American backed $3.2 billion of securities called special-facilities bonds sold through airports and municipal authorities to pay for gates and maintenance hangars in cities such as New York, Los Angeles and Dallas. American is the last large full-fare U.S. carrier to seek protection after the Sept. 11 terrorist attacks. American, which leased the airport facilities, and AMR guaranteed payment of the Alliance securities, according to an offering document. About $76.2 million of the debt was redeemed in 2004, according to data compiled by Bloomberg. Mike Petty, who manages New York-based MacKay Shields' Mainstay High Yield Municipal Bond Fund, didn't immediately respond to a telephone call seeking comment on the holdings. Capital Research & Management Co., a mutual-fund company based in Los Angeles, reported owning $2.5 million of the Alliance bonds as of June 30. Neil Langberg, manager of the firm's American High-Income Municipal Bond Fund, declined to comment. --Bloomberg News--