When Debt May Be Better Play than Stock

With news that American Airlines parent AMR Corp (OTC – AAMRQ - $0.50) is considering merger options with other regional airlines to stave off its creditors, a number of the stocks in the space are under some accumulation.

The reported candidates are Alaska Air (NYSE – ALK), JetBlue (NASDAQ – JBLU), Republic Airways’ Frontier Airlines (NASDAQ – RJET), US Airways (NYSE – LCC) and Virgin America.  Given the poor financial shape of AMR it is unclear how the equity holders would benefit from a merger with another party, such as US Airways, which may be a likely candidate.  Debt holders may get the lion’s share of the equity of the other stock leaving AMR shareholders with the crumbs.  Investors might get a quick pop depending upon terms, but we would be cautious and avoid trying to play it by buying the stock. Perhaps some senior debt is a better play…

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