Despite delusions to the contrary, "investors" are playing a game of the greater fool by continuing to hold shares of AMR Corporation (AAMRQ.PK). Even if the company receives a takeover offer from US Airways or another suitor, shareholders are likely to receive zero once the company is restructured.
In the unlikely situation that shareholders receive a non-zero amount (either as takeover consideration or as part of a company restructure), that amount is likely to be much lower than the 30 January closing price of $0.71.
Background and NYSE trading history
On 29 November, AMR filed for Chapter 11 bankruptcy protection. On that date the stock reached an intraday low of $0.20, giving the company a valuation of $67 million. It then rose sixfold in the following 6 trading days, reaching an intraday high of $1.20 on 7 December. This gave the bankrupt company at $402 million. Following that, the stock fell as low as $0.24 on 4 January, which was the last day it was listed on the NYSE.
Pink sheet trading history
On 5 January, shares of AMR started trading on the pink sheets. The shares rose gradually from $0.24 on 5 January to 0.44 on 19 January. Since then the stock rose as high as $0.74 on 24 January.
The Chapter 11 process in general
Chapter 11 bankruptcy protection allows companies to restructure their debt to a more manageable level, so they can continue to operate as viable entities. The two usual outcomes of the Chapter 11 process are:
- Creditors of the company receive less than the full amount they are owed. They may receive a cash payment and/or new debt to replace existing debt.
- The shares of the bankrupt company are cancelled, and therefore shareholders (who rank junior to creditors) receive zero.
As part of this process, creditors are sometimes given shares in the company. This provides partial compensation for receiving less than the full value of the amounts they are owed by the bankrupt company. The company can then relist their new shares, as a viable entity with a lower level of debt.
The Chapter 11 process for AMR
In AMR's bankruptcy filing it listed assets of 24.7 billion and liabilities of 29.6 billion. As discussed above, the usual process is for creditors to receive an amount less than what they are owed, with existing shares cancelled as part of the bankruptcy process. Existing shareholders can only realistically expect to receive a non-zero amount if creditors are paid in full. However, given that AMR's liabilities are $4.9 billion more than its assets, it should be clear that shareholders are excessively optimistic if they expect to receive anything in a balance sheet restructuring.
The rise in AMR's shares since 5 January can largely be attributed to several reports discussing potential bids for the company. Media reports have listed Delta Air Lines (NYSE:DAL), US Airways (LCC) and TPG Capital as interested buyers. More recently the stock rose above $0.70 in the days following another report discussing a potential bid by US Airways.
As described above, in Chapter 11 bankruptcy, creditors become the de facto shareholders of a company. Therefore even if AMR receives and accepts a takeover offer, this offer will almost certainly be made to its creditors only, with current holders of AMR stock being "offered" nothing. For example, if Delta or US Airways make a bid for AMR, a takeover bid may take the form of $0.40 cash for each $1 of debt held.
Nearly all of AMR's bonds trade below 30 cents in the dollar, despite recent takeover rumors. The trading of these bonds confirms that current shareholders will probably receive nothing when AMR is reorganized. If AMR stock held any long-term value, the company's bonds would be trading much closer to 100 cents in the dollar. Furthermore, these bonds are the only AMR security that hold any realistic chance of gaining in value in the days, weeks and months to come.
AMR's stock is trading above $0.70 on the "greater fool" theory and is likely to be worth zero when the company is reorganized, even if the reorganization takes the form of a takeover.
Disclosure: I am short AAMRQ.PK and long AMR bonds.
Disclaimer: The above commentary is provided for informational purposes only. This article does not take into account your personal circumstances, and as such, you should consider whether its content is relevant to your situation. Before buying or selling any security you should conduct your own research and analysis, and seek advice from an independent financial adviser.