When American Airlines parent AMR Corp. filed for bankruptcy protection in November 2011, its stock plunged to 20 cents a share and was soon delisted from the New York Stock Exchange. The entire company was valued at less than $90 million—less than the typical list price of a new passenger jet—and its executives and lawyers warned shareholders they could be wiped out, as usually happens in Chapter 11
reorganizations.Today, as American prepares to close a merger with US Airways Group Inc., the stock trades at just below $11, and a small group of investors who bet on it when it was flying low are poised to reap one of the biggest bankruptcy windfalls in years. That is thanks in part to a little-noticed quirk in the deal that means their holdings could translate into much larger stakes than previously expected in the combined airline, to be called American Airlines Group Inc.
"We're tickled to death," said Brett Kramer, managing partner of Pinnacle Investment Advisors, a Tulsa, Okla., firm that manages about $700 million worth of assets.
Mr. Kramer bought about $50,000 worth of American's shares when they were trading over the counter for about $1.35 each in February, a few days before the airline announced its merger. Today, Pinnacle's shares are worth more than $413,000.
Other big winners could include J.P. Morgan Securities, Solus Alternative Asset Management LP, Marathon Asset Management LP and Pentwater Capital Management LP. All held large positions in American's stock at the end of last year, according to court documents.
For an investor who bought American shares at their lowest closing price two years ago, the increase of more than 40 times to its current level is the best return over that period of any U.S.-listed company with a market value today of at least $300 million, according to a Wall Street Journal analysis of data from FactSet.
"I don't know if we had that expectation on day one," American Chief Executive Tom Horton said in an interview. "A lot of people were counting American out."
Creditors will be repaid in full, so anyone who bought American's debt at a discount made out well, too.
Many of the investment firms that bought American's depressed stock also traded in the airline's bonds, some of which went for as low as 15 cents on the dollar shortly after the company filed for bankruptcy protection.
Creditors usually don't enjoy such outsize financial recoveries in large bankruptcy cases, let alone get fully repaid with interest.There could be additional upside, because of a complex plan devised by executives, lawyers and bankers who negotiated American's reorganization and merger with US Airways. The merger plan allocated 28% of the combined airline to US Airways shareholders. Based on initial expectations of the value of the combined company, American's creditors were to get 68.5% of the new company and American's shareholders 3.5%.
That was already an unusually good outcome for American shareholders. But the deal provided an opportunity for them to get even more of the combined company. It estimated American's creditors would be fully repaid, with interest, if the shares in the new company exceed $15. Above that price, the plan dictated American's shareholders get the additional value, by receiving larger portions of the equity in the new company in exchange for their holdings in the old American.
Shares in the new American are set to start trading Monday, when the merger closes. American said this week that it expects the merged airline to begin trading at about the final closing price of US Airways on Friday. US Airways shares currently trade above $22—a roughly fivefold increase from two years ago—valuing the combined company at nearly $17 billion.
Based on the merger agreement, if that price stays steady for four months following the merger's close, American shareholders will ultimately receive nearly a third of the new company, valued at roughly $5 billion—nearly 60 times American's value at its nadir.
"That sort of recovery is close to unprecedented," said David Resnick, president of investment firm Third Avenue Management LLC and a former Rothschild Inc. banker who advised American early on in its bankruptcy.
The return could shrink. Some analysts have warned that American's shares may dip over the next several months, as creditors sell equity holdings. On Tuesday, shares in most airline stocks fell, after Delta Air Lines Inc. reported lower-than-expected revenue for November.
About 120 public companies with more than $500 million in assets have filed for bankruptcy protection since 2008, said Kevin Starke, an analyst at broker-dealer CRT Capital Group LLC. If the new American's stock price doesn't sink, only shareholders of American and mall-owner General Growth Properties Inc. will have ended up with shares worth more than their average price in the year prior to the bankruptcy filing, he said.
General Growth filed for bankruptcy protection during the throes of the financial crisis. The company's stock closed at as low as 25 cents a share around that time, but by March 2010 traded above $14, as the mall owner shored up a plan to cut debt.
Not every investor made out well on American. Investment adviser Douglas Lane said he lost more than $5 million of his clients' money when American filed for bankruptcy in November 2011. He sold most of his client's stock before it regained value.
"When you've got egg on your face and you don't know how long you're going to have egg on your face," he said, "why leave it in there to remind them how stupid you were?" He said his other airline investments are up about 50% since the bankruptcy, surpassing the losses on American.
Heading into its restructuring, American struggled with rising fuel prices and high labor costs. It initially resisted merger overtures from US Airways after its bankruptcy filing, and many analysts questioned its ability to compete alone against bigger rivals.
Several factors improved the outlook: It received financial concessions from unionized employees; oil prices remained largely stable; and the merger agreement promised enticing revenue increases and cost savings once American exited from bankruptcy.
Those dynamics created a "trifecta," Mr. Resnick said. "The odds of that happening, in my experience, are getting three lemons when you pull the lever on the slot machine."
Even after the merger was inked, an August lawsuit from the Justice Department threatened to ground the deal for antitrust reasons. The airlines reached a settlement with the government last month.
Highland Capital Management LP started buying American stock early this year and snatched up more after the Justice Department's lawsuit. "We were confident in the ultimate resolution," Jim Dondero, co-founder and president of the Dallas investment firm, said in an email. He didn't address the firm's returns.
Solus, a New York firm that trades distressed debt, held 5.4 million American shares as of Dec. 20, 2012, according to court records. Those shares traded then at around 86 cents for a total value of about $4.6 million. Today, they are worth about $58.7 million.
Solus built its position to more than 10 million shares, according to people familiar with its trades. The firm was bullish in part because of a broader recovery in the airline industry and support from unionized airline workers for a merger, they said. Solus's current holdings couldn't be determined.
J.P. Morgan held nearly 7.1 million shares in AMR on Dec. 13, 2012, according to court documents, a stake worth $5.4 million then. At today's stock price, those shares would be worth about $77 million. A person familiar with the bank's trades said J.P. Morgan's current position is considerably smaller than its 2012 holdings. Other details of the bank's trading couldn't be determined.
Mr. Kramer of Pinnacle said he watched AMR for months but was still nervous when he bought. "We knew there was risk," he said. "If we thought there was no risk, we would've bought a whole lot more than 38,000 shares."
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