Airline bankruptcy includes unfunded commitments

The bankrupt parent company of American Airlines had $389m-worth of unfunded exposure to private equity funds as of 31 December. It’s not clear if the company will continue to meet capital calls through bankruptcy proceedings.

American Airlines’ parent AMR Corporation has a chunk of unfunded commitments to private equity managers through its employees’ pension that could be left in limbo after the company sought the protection of bankruptcy court from creditors last week.

As of 31 December 2010, the fair market value of the company’s private equity holdings was $795 million, with unfunded commitments of $389 million, according to American Airlines’ 2010 annual report. The value of the private equity portfolio stood at $744 million as of 31 December 2009, according to the documents.

While it’s not clear with which managers the company has uncalled commitments, the pension has invested over the years with such managers as JW Childs, Oak Hill Capital Partners, The Carlyle Group, Goldman Sachs and Castle Harlan, according to Private Equity International’s exclusive data provider Private Equity Connect.

It’s also not clear if the company will continue to meet capital calls through the reorganisation process. Pension assets of American Airlines, which is a wholly owned subsidiary of AMR Corporation, are invested by a firm called American Beacon Advisors, which the company divested in 2008. AMR owns less than 10 percent of American Beacon Advisors, and the firm is not part of the bankruptcy filing.

Spokespeople for AMR Corporation and American Beacon declined to comment about the private equity holdings.

Executives who run AMR’s private equity investments at American Beacon include Kirk Brown, who was promoted in 2007 to managing director of Trust and Alternative Investments. Another executive who worked with the alternatives portfolio was Lars Pace, who left the firm last year for Hamilton Lane.

Intense competition

AMR Corporation filed for bankruptcy on 29 November, reporting liabilities of about $29.5 billion compared to $24.7 billion in assets. The company blamed falling sales and a weakened position in the market compared to competitors that filed for Chapter 11 protection after the terrorist attacks of 11 September 2001.

“The intensity of … competition has increased markedly since the advent of Internet-based marketing and reservations systems that resulted in complete price transparency to the consumer – making comparison shopping for the lowest fare extremely easy,” said Isabella Goren, AMR’s chief financial officer, in bankruptcy documents.

AMR’s employees’ retirement pension is valued at close to $8 billion. Pensions of companies that file for bankruptcy in the US can be rescued by the Pension Benefit Guarantee Corporation if the companies stop supporting their obligations.

According to a spokesperson for the PBGC, the agency would assume responsibility for AMR’s pension obligations, including its private equity holdings, and would continue to meet capital calls. However, the agency “hopes the [pension] plans continue and PBGC does not have to assume them”, the spokesperson said.

WaMu capital calls

Limited partners that miss capital calls can be hit with punitive measures by general partners known as default interest penalties. Another major bankruptcy had its share of contention over unfunded private equity commitments.

In 2008, Washington Mutual, which formerly owned Washington Mutual Bank, filed for bankruptcy and as part of the proceedings attempted to sell interests in 10 venture capital funds after being penalised for not meeting a $700,000 capital call from one of the funds. A growth capital firm called FTVentures hit the company with an 18 percent default interest accrual on the amount of the capital call, but Washington Mutual fought back by arguing the company was protected from the obligation by bankruptcy laws.

Washington Mutual eventually agreed to sell the stakes in some of the funds to Industry Ventures Funds V for about $3.5 million.