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American Airlines municipal bonds take flight for U.S. mutual funds

An American Airlines passenger jet taxis to a runway as a Southwest Airlines jet (rear) lands at San Francisco International Airport in San
An American Airlines passenger jet taxis to a runway as a Southwest Airlines jet (rear) lands at San Francisco International Airport in San

By Tim McLaughlin

BOSTON (Reuters) - Debt issued on behalf of a bankrupt airline has turned into one of the unlikeliest winners on the U.S. municipal bond market.

Municipal bonds issued for bankrupt American Airlines that once traded for less than 20 cents on the dollar have taken flight over the past year, scoring big-ticket gains for a handful of U.S. municipal bond fund managers.

And now, especially after the U.S. Department of Justice cleared the way for American to merge with US Airways Group Inc to become the world's largest airline, the prices on secured and unsecured American muni bonds on Wednesday continued to rally.

The merger, now expected to close in the first half of December, is central to American's effort to emerge from a two-year bankruptcy process.

The price of muni bonds issued on behalf of the airline in 1993, for example, rose to $1.15 on Wednesday, well above a low of 16 cents on the dollar in late December 2011, a month after American filed for bankruptcy protection.

One of the biggest winners is John Miller, portfolio manager of the $7.3 billion Nuveen High-Yield Municipal Bond Fund . In May 2012, he began buying unsecured American bonds at a large discount to their face value, according to Lipper Inc data and disclosures made by the fund.

The Nuveen Fund at the end of October 2012 held more than $100 million worth of American-related municipal bonds. Since then, prices on some of those bonds climbed more than 60 percent.

The Nuveen fund is down 4.45 percent in 2013, but it is outperforming 76 percent of the funds in the high yield municipal category, according to Morningstar Inc. Miller was not immediately available to comment.

Nuveen funds have been among the biggest buyers of about $1.5 billion in bonds deemed unsecured in American's bankruptcy proceeding. Unsecured bonds are especially risky because they're not backed by equipment, a revenue source or real estate, but only by the promise of the corporation to repay. The bonds typically were used to finance American's terminal improvements at airports in Chicago, Dallas and New York, for example.

The Oppenheimer Rochester Fund Municipals also owns the debt of American and other airlines, but the bonds are backed by a security interest in airport terminals and maintenance facilities.

"These bonds offer investors valuable collateral," the fund said in a disclosure to investors. And it cited how in late 2012, bonds secured by the terminal at John F. Kennedy International Airport were paying off after parent AMR Corp missed debt payments.

The $6.5 billion Rochester Fund Municipals' largest holding at the end of September were bonds backed by American Airlines, accounting for 5.6 percent of the portfolio.

(Reporting by Tim McLaughlin; Editing by Leslie Gevirtz)

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