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Buzz and Banter



Early Monday morning American Airlines (AMR:NYSE) announced its plan to sell $250 million of convertible bonds through Merrill Lynch and Morgan Stanley. This amount represents around 20% of the company's stock capitalization, a very high ratio. The bankers late in the day called the company with the news that under the current pricing there was only $150 million in demand. Since the bankers did not have the appetite (for risk) to take down the excess, the deal would have to be re-priced (by lowering the premium to make it more attractive for the buyers) to clear $250 million. The company pulled the deal stating it had alternatives.

The convertible bond managers, who were the buyers, have in the last several months been willing to take more risk than straight debt buyers (in my opinion) and therefore have been the "source of choice" for corporate refinancings. It is clear that their appetite for risk met its limit in this case, so what alternatives AMR has, is somewhat of a mystery. It is hard to imagine raising this much capital with straight equity or debt.

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