This morning’s bankruptcy filing from AMR (AMR) isn’t a huge surprise: As we noted in a footnotedPro report on the company last month, rumors have been swirling for some time. But the news gives us an opportunity to talk about what we said in our Oct. 21 report (PDF, subscribers only) – and we’ll take that opportunity, since we normally keep our Pro material under wraps, to give paying customers exclusive access to the more actionable things we find in the filings.
Because rumors had been swirling about AMR, we took a close look at the airline company’s 10-Q filing, which came out late in the day on October 19. We found a few notable disclosures that had changed from its previous quarterly filing. And under our operating principle that there are very few accidents in Securities and Exchange Commission filings, we called our subscribers’ attention to them.
Specifically, we noted that the company had made its language about asset encumbrance even more dire than it previously was. Here’s one of the examples we pointed out, where the bold-faced text was a new addition:
“Almost all of the Company’s aircraft assets (including aircraft eligible for the benefits of Section 1110 of the U.S. Bankruptcy Code) are encumbered, and the Company has a very limited quantity of assets which could be used as collateral in future financing.“
Elsewhere in the filing, the company used similar language again — a notch more pessimistic than its earlier phrasing in the same context, when it had said events had “significantly reduced the quantity of our assets which could be used as collateral…”
We also looked closely at the company’s pension footnote. That’s because other airlines that have filed for bankruptcy have done their best to shed their pensions in bankruptcy proceedings, and there was good reason to think AMR might try to do the same. Sure enough, we found language that suggested AMR might have been thinking the same thing — language that could be used to bolster the argument that the company had in fact warned investors about such matters well in advance. (That is, after all, much of what’s going on in SEC filings: CYA with an eye on securities litigation.)
What caught our attention was a new risk factor that described the problems the company was having in retaining pilots — they were retiring faster than normal, which had been discussed previously in the press. But this seemingly innocuous line caught our attention: ” We are also taking other steps in an effort to reduce the impact of these retirements.” We read that as potential code for plans to ditch the pension, effectively only possible in bankruptcy court. Higher-than-normal retirements can drain a pension plan of resources, requiring the company to contribute more. The company was already facing a $560 million mandatory contribution in 2012, with the prospects for more if the gap between pension assets and liabilities continued to grow.
Incidentally, it’s worth pointing out that we weren’t the only ones at Morningstar with doubts about AMR’s future. Our colleague in Morningstar Equity Research, Basili Alukos, also put out a grim report on the same day that we published ours, with credit analyst Rick Tauber. It carried the bold headline: “We now doubt that AMR can survive as a going concern.” (Here’s the report on Morningstar.com, where it has since been topped by yesterday’s credit report on AMR, and here’s the PDF version for Morningstar Select customers, where the headline was an even starker “We Now Believe That AMR Will Succumb to Bankruptcy.”) Alukos was right, of course, and was either the first equity analyst to say it in so many words, or at the very least one of the first.
We weren’t that definitive in our report: We specialize in finding clues in public disclosures, not in fundamental research or making buy/sell calls. But we’re happy to report that, more than a month in advance, our subscribers had a little additional data to fill out their own analysis of AMR’s prospects.
Image source: Job Garcia via Flickr
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