More On Legal & Compliancefrom The Advisor's Professional Library
- Nothing but the Best Execution Along with the many other fiduciary obligations owed by RIAs, firms owe a duty to seek best execution of clients transactions. If they fail to do, RIAs violate Section 206 of the Investment Advisers Act.
- Pay-to-Play Rule Violating the pay-to-play rule can result in serious consequences, and RIAs should adopt robust policies and procedures to prevent and detect contributions made to influence the selection of the firm by a government entity.
AMR, the parent company of American Airlines and American Eagle, filed for Chapter 11 bankruptcy on Tuesday, citing its “very substantial cost disadvantage” compared with competitors and its labor costs. It had been the last of the “legacy” airlines to do so, and its action could affect the municipal bond market.
Bloomberg reported that Tom Horton replaced Gerard Arpey as chairman and CEO after the filing, which took place Tuesday in U.S. Bankruptcy Court in Manhattan and listed $24.7 billion in assets and $29.6 billion in debt. Arpey had been asked to remain, but decided against it and will instead join Emerald Creek Group, a private-equity firm founded by former Continental Airlines Inc. CEO Larry Kellner, on Dec. 1, according to a company statement.
In a research note, J.R. Rieger, vice president of fixed income indices at S&P Indices, said of the move, “The S&P Municipal Bond Index, a broad benchmark index which tracks over $1.3 trillion of municipal bonds, includes a total of 29 American Airlines-backed municipal bonds totaling over $3 billion in par value. The American Airlines-backed municipal bonds represent 0.232% of the total par value of the Index. The bankruptcy and uncertainty it brings for the unsecured bonds in particular could have a significant negative impact on the market value of these bonds.”
He added, “Municipal issuers of corporate-backed debt include industrial development authorities, economic development authorities, port authorities and environmental and pollution control authorities. When issued for a specific corporation, the repayment of these types of municipal bonds is guaranteed by the corporate entity (the guarantor) and/or specific revenue generated by the project itself. The American Airlines bankruptcy filing will bring uncertainty in regards to the repayment of these particular municipal bonds backed by American Airlines.”
S&P Indices added that the S&P National AMT-Free Municipal Bond Index is not affected by the American Airlines bankruptcy. Only investment-grade bonds are included in this index and bonds backed by corporate issuers are specifically excluded.
Harvey Miller, the company’s bankruptcy lawyer, said at a court hearing in Manhattan on Tuesday that the company’s cost structure in comparison with other airlines was “untenable,” and that the airline had “fought ferociously” to avoid the filing. However, now it intended to use the bankruptcy to realign its business to become profitable. Company stock has fallen 79% in 2011 over concerns that it would indeed file for bankruptcy.
Chief Financial Officer Isabella Goren said in court papers that the company had the highest operating costs among the four surviving major U.S. airlines. According to Horton, the bankruptcy “resets” the process for union talks; the company has been trying to wrest substantial concessions from unions, and the last contract offer presented to the Allied Pilots Association had not been set for a vote because leaders said it “clearly” would be rejected.