Business Context and Reporting Period
This Form 8-K filing by AMR Corporation (parent of American Airlines, Inc.) is dated June 25, 2009. The report details an amendment to the company's Amended and Restated Credit Agreement, originally dated March 27, 2006. The agreement involves a fully drawn $433 million secured bank term loan facility with a final maturity of December 17, 2010.
Key Financial Metrics and Covenant Status
The filing focuses on the "EBITDAR Covenant," which requires a minimum ratio of cash flow to fixed charges. The company has obtained lender approval to waive compliance for the quarter ending June 30, 2009.
| Period | Original Minimum Ratio | Amended Minimum Ratio |
|---|---|---|
| Quarter ending June 30, 2009 | 0.90:1.00 | Waived |
| Quarter ending September 30, 2009 | 0.95:1.00 | 0.95:1.00 |
| Two quarters ending December 31, 2009 | 1.00:1.00 | 0.95:1.00 |
| Three quarters ending March 31, 2010 | 1.05:1.00 | 0.95:1.00 |
| Four quarters ending June 30, 2010 | 1.10:1.00 | 1.00:1.00 |
| Four quarters ending September 30, 2010 | 1.15:1.00 | 1.05:1.00 |
The filing does not provide specific revenue, profit, or cash flow figures for the current period, only the covenant thresholds.
Material Changes and Cost Implications
As a condition of the covenant waiver and amendment, the cost of borrowing under the Credit Agreement will increase significantly:
- Interest Margins: Margins for "Eurodollar Rate Advances" will increase from 2.00% to 4.00% over LIBOR. Margins for "Base Rate Advances" will increase from 1.00% to 3.00% over the Base Rate.
- Interest Rate Floors: A new minimum LIBOR rate of 2.50% per annum and a minimum Base Rate of 3.50% per annum will be established, whereas no such fixed minimums previously existed.
- Fees: American Airlines will pay fees to consenting lenders, the administrative agent, and joint lead arrangers.
Outlook, Risks, and Contingencies
The amendment is expected to become effective on June 26, 2009, subject to the satisfaction of conditions including fee payments. The filing includes extensive forward-looking statements and risk factors, highlighting:
- Financial Condition: The company cites a "materially weakened financial condition" due to significant recent losses.
- Liquidity Needs: A stated need to raise substantial additional funds on acceptable terms.
- Operational Risks: Risks include the severe global economic downturn, high and volatile fuel prices, substantial indebtedness, and the ability to satisfy existing financial covenants.
- External Factors: Potential impacts from disease outbreaks (e.g., H1N1), terrorist attacks, labor costs, and competitive pressures.
Investor Verification Checklist
- Verify the actual EBITDAR ratio for the quarter ending June 30, 2009, to understand the severity of the covenant breach necessitating the waiver.
- Confirm the total amount of fees paid to lenders and agents as part of the amendment.
- Monitor the company's ability to meet the new, albeit lower, EBITDAR ratios for the periods ending December 31, 2009, and March 31, 2010.
- Assess the impact of the increased interest rate margins and new rate floors on future interest expense and liquidity.
- Review subsequent filings for updates on the company's ability to raise additional capital as mentioned in the risk factors.