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What bankruptcy means for JAL

by Kazuaki Nagata

The government has effectively gotten Japan Airlines Corp.’s main creditor banks to agree to let JAL file for bankruptcy under the Corporate Rehabilitation Law, and the carrier may do so Tuesday.

It remains unclear, however, how Japan’s biggest airline can be resurrected under court-led restructuring.

Following are questions and answers regarding the Corporate Rehabilitation Law and how it may be applied to JAL:

How does restructuring work under the Corporate Rehabilitation Law?

Once an application is filed with the court and approved, the court appoints trustees who would be responsible for drafting and carrying out a reconstruction plan.

Typically, a failed firm’s management steps down after a bankruptcy filing, and third-party trustees manage the reconstruction plan to ensure fairness and transparency.

But a number of companies have recently pursued debtor-in-possession corporate rehabilitation. This allows sitting management to act as trustees if they meet certain conditions, including approval from major creditors, provided they haven’t committed legal violations that caused the firm’s financial problems.

In general, trustees submit a reconstruction plan in about six to 10 months, and it takes about six months to a year or more for the plan to be approved.

After the court and creditors OK a reconstruction plan, trustees are responsible for carrying it out.

How will JAL be rehabilitated?

Enterprise Turnaround Initiative Corp., a government-backed body tasked with JAL’s reconstruction, reportedly wants the carrier to file for bankruptcy next week, when ETIC is expected to officially announce how it plans to restructure the firm.

After filing under the Corporate Rehabilitation Law, JAL’s current management is expected to step down, as JAL President Haruka Nishimatsu has said he will resign once it is determined how the reconstruction will proceed.

The government and ETIC have reportedly asked Kazuo Inamori, honorary chairman of Kyocera Corp., to serve as chief executive of JAL during the turnaround process.

A new management team is likely to become trustees responsible for implementing the rehabilitation plan.

According to recent media reports, ETIC’s plan includes cutting 15,600 jobs, or about 30 percent of JAL’s workforce, by the business year ending in March 2013, as well as cutting around 26 routes.

Once the plan is in place, ETIC reportedly aims to restructure JAL within three years.

What about the fate of JAL’s stock, whose share price has plummeted, hitting a closing record low of ¥7 Wednesday?

ETIC is expected to have JAL delisted from the Tokyo Stock Exchange if it pursues a 100 percent capital reduction under the Corporate Rehabilitation Law.

In the event of a 100 percent capital reduction, shares generally become worthless.

One reason for the reduction is to pin the responsibility on shareholders for failing to exercise oversight of management. Another is to speed up the reconstruction, since getting shareholder approval for major changes at a listed firm is time-consuming.

Why does the government prefer court-led rehabilitation?

With heavy court involvement, the process is considered transparent. The government appears to favor this route because it makes a large amount of public funding available for JAL’s bailout.

Also part of the process to tap taxpayer money for saving JAL was to get retirees and current employees to agree to massive cuts in their pension benefits.

The court-led route is also said to work well with a firm like JAL, which has huge debts and many unprofitable operations. The process can drastically reduce a company’s obligations to creditors compared with an out-of-court settlement, under which major creditor banks would voluntarily abandon some claims.

Domino effect

Kyodo News

Group firms of Japan Airlines Corp. have 13,334 domestic business partners that could be affected by the carrier’s restructuring, a credit research company said Wednesday.

Tokyo Shoko Research said 2,910 of the firms have direct business relations with JAL group companies, while 10,424 companies, including second tier contractors, have indirect business relations.

The government says JAL will continue to make payments for general business transactions based on existing contracts, even if it undergoes legal bankruptcy proceedings.