Japan Airlines' bankruptcy proposed as option to banks: Sources

A state-backed turnaround fund may seek to put Japan Airlines Corp through bankruptcy court if it decides to support the struggling carrier, two sources with knowledge of the matter said.

JAL, Asia's largest airline by revenue, applied in October for help from the Enterprise Turnaround Initiative Corp of Japan (ETIC), a body of turnaround specialists established to bail out companies with state-guaranteed funding.

The ETIC has discussed with JAL's creditors the possibility of using a Chapter 11-style bankruptcy procedure if it decides to support the carrier, but has not ruled out a restructuring outside of bankruptcy court, the two sources said.

The sources spoke on condition of anonymity given the sensitivity of the matter. The ETIC and JAL declined to comment.

The ETIC also met with JAL over the weekend and explained that bankruptcy was being considered as an option, the two sources said. The ETIC will meet again with creditors as early as Monday to continue discussions on JAL, they said.

The ETIC is expected to make a final decision on whether to support JAL with loans and investments next month.

JAL is saddled with some $15 billion in debt. If it fails it would be one of Japan's largest bankruptcies in recent years.

"If JAL really were to file for bankruptcy, that would cause chaos," said Kotaro Toriumi, an airline analyst and professor at Josai International University. "At this moment I think the chance of a JAL bankruptcy is still quite small."

If the ETIC decided to assist JAL in its revival, one option would be to have JAL file for reorganisation under the Corporate Rehabilitation Law, a process similar to Chapter 11 in the United States and used in large, complicated cases such as JAL's.

The ETIC would then extend loans and possibly invest equity into the carrier to help it rebuild itself, one of the sources said.

The chances of bankruptcy appeared to increase last week after finance minister Hirohisa Fujii said the government would not guarantee funding to JAL, whose banks are wary of extending fresh loans without the state's backing.

But investors seem to be taking the risk of bankruptcy in their stride, with JAL's share price down just 1% at 96 yen by early afternoon, against a 1.3% rise in the benchmark Nikkei average.

JAL's stock has already lost more than half its value this year while the spread on its 5-year credit default swaps , which are used as insurance against bankruptcy, are quoted at distressed levels above 2,300 basis points.

"The market consensus seems to be they will never let JAL go bust, and the impact of JAL's problems on the overall economy has already largely been factored in," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.

Kyodo news agency and the Nikkei newspaper said on Monday that the ETIC had proposed bankruptcy as an option. Reuters reported last week that the ETIC had not ruled out bankruptcy as part of a revival plan.

JAL's main creditors include the state-owned Development Bank of Japan and the country's top three private banks — Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group.

While struggling to avoid bankruptcy, JAL is being courted by American Airlines and Delta Air Lines with rival offers of financial aid. The US carriers are eyeing a greater foothold in Japan and access to JAL's network to the rest of Asia.

JAL says it will make a decision on which overseas partner it will choose by early January.