Shares of Japan Airlines Corp fell as much as 11 percent and revisited a record low on Tuesday as investor worries mounted the carrier will be restructured in bankruptcy court.
The stock's slide came after reports that a state-backed turnaround fund, which is now weighing whether to support JAL, was considering a bankruptcy filing as one component of its restructuring plan.
The state-backed Enterprise Turnaround Initiative Corp of Japan (ETIC) has told creditors in meetings over the past few days that it may push JAL to use Japan's Corporate Rehabilitation Law, a process similar to a Chapter 11 bankruptcy in the United States.
The bankruptcy procedure would likely render JAL shares worthless while also causing bigger losses for the airline's main creditors, which include Japan's three largest private lenders, than in a private, out-of-court restructuring.
A bankruptcy could also complicate talks with American Airlines and Delta Air Lines , which are courting JAL with rival offers of investment to gain access to its network in Asia and closer ties on U.S.-Japan routes.
Shares of JAL closed down 8.3 percent after touching a record low of 85 yen hit in late November. The stock has lost nearly 60 percent of its value this year.
There's a lot of concern about what might happen if JAL does end up going through bankruptcy court, what will happen to shareholders if the stock basically becomes worthless, said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities.
No one at JAL or the ETIC could be reached for comment.
JAL was saddled with 1.5 trillion yen ($16.4 billion) in total liabilities as of the end of September. At that level of debt, its bankruptcy would be the 6th biggest ever in Japan, ranking just below the 2001 collapse of retailer Mycal.
JAL's main creditors are the state-owned Development Bank of Japan and the three megabanks -- Mitsubishi UFJ Financial Group <8306.T>, Mizuho Financial Group <8411.T>, and Sumitomo Mitsui Financial Group <8316.T>.
Executives of the ETIC, the main creditors and Transport Minister Seiji Maehara met on Tuesday to discuss JAL, a source with knowledge of the matter told Reuters. The source was not authorized to talk to the media and therefore declined to be named.
At the meeting, the banks told Maehara that at this moment they could not accept the ETIC's plan to put JAL through bankruptcy.
The chances of bankruptcy appeared to increase last week when Finance Minister Hirohisa Fujii said the state would not back any more loans to JAL. Banks are wary of extending fresh loans to JAL unless the state insures them against losses.
The plan under consideration by the ETIC involves it offering financing to JAL, either in the form of loans or investment, upon the carrier filing for bankruptcy protection. The ETIC can draw on 1.6 trillion yen in state-guaranteed funding through March.
While restructuring in bankruptcy court would make for a more transparent process, it would also raise the need for a massive amount of funds over the short term given that suppliers of fuel and other business partners may demand the carrier pay in cash.
(Reporting by Taro Fuse, Nobuhiro Kubo, Yoshifumi Takemoto, Nathan Layne and Elaine Lies; Editing by Chris Gallagher and Muralikumar Anantharaman)