The bankruptcy of AMR (NASDAQOTH: AAMRQ), parent company of American Airlines, has been a wild ride for investors. After seeing shares become nearly worthless following the initial bankruptcy filing, shares rocketed after the reorganization plan called for AMR common shareholders to receive a stake in the new American Airlines Group (AAL -2.92%). But a recent development in the American Airlines/US Airways merger has caused many AMR shareholders to panic. Taking a closer look at company documents, these fears are greatly exaggerated and there is likely still significant value left over for AMR shareholders.
Scary press release
The official merger of AMR and US Airways occurred early on December 9 and was quickly followed by a press release from American Airlines Group. The part that had AMR shareholders panicking was this part of the press release:
American Airlines Group has determined that holders of AMR common stock (formerly traded under the symbol: "AAMRQ") will receive, for each share of AMR common stock, an initial distribution of approximately 0.0665 shares of AAL in connection with the occurrence of the effective date of the Plan.
Many investors interpreted this to mean that AMR shares would be turned into 0.0665 shares of American Airlines Group and nothing more. With American Airlines Group shares trading around $25, this would mean AMR shares would only be worth $1.66, a massive drop from their $11.39 Friday closing price.
While I certainly believe the market does misprice some securities, it would have to have been way off base to have priced AMR shares at $11.39 if they were only worth $1.66. Turns out, the market was valuing AMR shares much more fairly than many investors had feared. Reading further on in the press release, it states:
AAMRQ holders may in the future receive additional distributions based on the trading price of AAL common stock during the 120-day period after the effective date and the total amount of allowed claims, in each case, in accordance with the terms of the Plan.
Unlike the past bankruptcies of Delta Air Lines (DAL -1.53%) and United Airlines, now part of United Continental (UAL -1.49%), AMR shareholders are receiving part of the new reorganized airline. Shareholders of bankrupt Delta and United stock didn't have the same complicated process AMR shareholders are going through because there wasn't enough equity left over to pay Delta or United shareholders anything.
However, AMR shareholders do get a piece of the new airline but are being treated in a way similar to how AMR's other creditors are being treated. Distributions to AMR creditors are being made over the next four months and AMR shareholders are being treated in a similar fashion, after all, they are behind the creditors in line when it comes to payments.
So why does American Airlines Group use the term "may" instead of "will" when it comes to AMR shareholders receiving additional shares? Although American Airlines Group shares are trading well above the level where additional shares begin to be issued to AMR shareholders, American Airlines Group shares could change in value in the meantime.
It would take a major double-digit move downward in American Airlines Group stock to prevent additional shares from being issued to AMR shareholders. Such a downward move would likely require a major event such as an economic collapse or a terrorist attack. Therefore, AMR shareholders are highly likely to receive additional shares under the terms of the AMR reorganization plan but since American Airlines Group cannot 100% guarantee the value of its stock, the press release must say "may" instead of "will" for legal reasons.
Calm down, AMR shareholders
AMR shares are no longer tradable and that is a good thing for the investors who were startled by this press release and would have sold their shares below fair value. And if you don't think airline stocks can't be quickly driven down by false impressions, take a look at United Airlines stock, which plunged from $12 to around $3 back in 2008 after a false rumor that it had filed for bankruptcy spread like wildfire.
It was clearly spelled out in the AMR bankruptcy documents that AMR shareholders would receive 3.5% of American Airlines Group and additional shares if American Airlines Group stock rose higher. In fact, the plan notes that the vast majority of payments to AMR shareholders at this price level for American Airlines Group stock would come in the form of these additional share distributions. We are now well past the level where additional shares begin to be issued. So the 0.0665 shares of American Airlines Group is the first part of the payment to AMR shareholders. And it's time to calm down since chances are there are more shares to come.