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Bankruptcy would be bitter medicine for JAL

by Kazuaki Nagata

Enterprise Turnaround Initiative Corp. of Japan, a state-backed body tasked with Japan Airlines Corp.’s rehabilitation, is expected to decide within this month whether and how it will save the nation’s largest airline. A major focus is whether the program will be a court-led bankruptcy or handled out of court.

ETIC reportedly favors a court-led bankruptcy, while JAL’s major creditors favor the second option.

What are the differences between the two, and their advantages and disadvantages?

Following are basic questions and answers for the court-led and out-of-court processes:

What are merits and demerits of court-led rehabilitation?

ETIC reportedly plans to ask JAL to apply for the court-led rehabilitation under the Corporate Rehabilitation Law.

One merit to this is that it would allow related parties to drastically restructure the company, such as getting rid of the firm’s debts by selling corporate assets, under the supervision of the court.

The government, which would use massive public funds to bail out JAL, can expect good transparency in the process because all the procedures would go under the court’s supervision, another apparent reason the government is considering this method.

Meanwhile, shareholders would incur great losses through expected capital reductions in bankruptcy procedures.

The court-led rehabilitation also comes with a strong negative image of “bankruptcy” and may cause credit problems for the carrier and loss of customers, analysts said.

“I think (the negative image of the court-led rehabilitation) is quite big,” said Mitsuru Miyazaki, a chief analyst at SMBC Friend Research Center.

Three private banks, Mizuho Corporate Bank, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corp., reportedly oppose the court-led bankruptcy option citing possible credit problems the company may face.

The negative image of bankruptcy may prompt some of JAL’s business partners to quickly withdraw their credit and request cash up front for transactions, which would damage JAL’s fund flows, Takahiko Kishi, senior analyst at Mizuho Investors Securities, pointed out.

Still Kishi said the court-led bankruptcy is probably more effective for JAL’s restructuring, as the company has long been suffering huge debts.

“I think the court-led procedure would be better to simply cut off the past ball and chain,” he said.

What about out-of-court rehabilitation?

Under this procedure, major credit banks would agree to voluntarily abandon some of their credits to JAL to help the company turn around, without legal steps being taken.

In contrast to the court-led process, it is likely to avoid the negative image of JAL as bankrupt, and damage to consumer confidence is likely to be less.

At the same time, the rehabilitation plan may not be as drastic as the court-led procedure and be insufficient for JAL’s long-term survival.

SMBC’s Miyazaki said he prefers the out-of-court process with the government initiative if possible.

“JAL’s financial problem was not all its own fault. The company’s management has been affected by the government’s aviation policy to a certain degree. So I think there is no choice for the government but to take the initiative in the reconstruction process,” Miyazaki said.

Is there any chance either procedure will disrupt JAL’s operations?

Since the court-led procedure has a greater risk of damaging credit confidence in JAL, it could lead to loss of customers and business partners and could also disrupt operations.

Business daily Nikkei Shimbun reported in Friday’s edition that some overseas creditors could try to seize JAL’s assets, including airplanes, since legal procedures in handling bankruptcy differ from country to country.

Maehara has repeatedly said the government will prevent a situation in which aircraft are not able to fly no matter what rehabilitation process JAL takes.