TOKYO - Japan Airlines Corp stock tumbled as much as 32 percent to a record low on Wednesday on growing expectations the struggling carrier was headed for bankruptcy under a state restructuring plan.
A government-backed turnaround fund has told JAL's main creditors it was leaning toward a bankruptcy proceeding as part of a rescue package for Asia's largest carrier by revenue, sources with knowledge of the matter told Reuters.
A bankruptcy could wipe out the value of JAL's shares and trigger greater losses for creditors, which include the state-owned Development Bank of Japan (DBJ) and the country's three largest private banks.
With $16 billion in total debts a JAL failure would rank as the 6th-biggest ever in Japan. It could also impact talks with American Airlines and Delta Air Lines, which are courting JAL with rival offers of financial aid.
Shares in JAL closed 23.86 percent lower at 67 yen, knocking its market value down to about $2 billion. The stock earlier tumbled as low as 60 yen and volume surged to nearly 400 million shares, a record since the carrier relisted in 2002.
If JAL really does go into a court-led reorganization the shares would literally become wastepaper, and that's the nightmare scenario for shareholders, said Tsuyoshi Kawata, a senior strategist at Nikko Cordial Securities.
The chances of bankruptcy appeared to increase last week when Finance Minister Hirohisa Fujii said the government would not back any more loans to JAL. Private banks are unlikely to extend loans without guarantees against future losses.
Transport Minister Seiji Maehara said the government was looking into establishing a new lending framework for JAL using the DBJ. The JAL has already used 55 billion yen of a 100 billion yen credit line recently extended by the state-owned bank.
Money is the biggest point when it comes to addressing growing worries over creditworthiness, Maehara told reporters after a meeting of cabinet ministers on how to restructure JAL.
Japan Airlines applied in late October for a bailout from the Enterprise Turnaround Initiative Corp of Japan (ETIC), an organization of turnaround specialists that can draw on 1.6 trillion yen ($17.4 billion) in state-guaranteed funding for the fiscal year to March to offer financial aid to ailing firms.
The ETIC is expected to make a decision on whether to support JAL next month.
The ETIC has told JAL's creditors it was considering a plan under which the airline would apply for court protection under the Corporate Rehabilitation Law, a process similar to Chapter 11 in the United States, sources told Reuters.
The sources spoke on condition of anonymity because the talks are not public. Officials at the ETIC and JAL declined to comment.
While the ETIC sees a bankruptcy as the most transparent and effective way to restructure JAL, it has not entirely ruled out a private restructuring in coordination with debt forgiveness from its main banks, sources said.
A court-led restructuring is right now the strongest possibility, one source with knowledge of the deliberations between the state-backed fund and the banks said.
Bankruptcy proceedings usually lead to a sharp cut in the payment of sales receivables and other creditor claims. There is a risk JAL would not be able to make payments for fuel, parts and other transactions needed to keep flying.
The ETIC plans to guarantee such transactions if JAL files for bankruptcy, a source said, confirming an earlier report in the Nikkei business daily. The guarantees would include airport fees and insurance premiums, the source said.
JAL is headed for its fourth loss in five years, hit by the global downturn in travel and a bloated cost base that makes it less efficient than domestic rival All Nippon Airways.
It is also struggling to get the two-thirds approval it needs from employees and retirees for cuts in their pension payouts so that it can get its pension shortfall, estimated at 331 billion yen in March, down to a more manageable size.
JAL is planning to get a final tally on whether it has the support it needs for the cuts on January 12. Reducing the shortfall is a prerequisite to getting a state bailout.
(Additional reporting by Sumio Ito, Yuko Yoshikawa and Takeshi Yoshiike; Editing by Joseph Radford and Simon Jessop)