Without Creditor Support, Latest JAL Rehab Plans Will Not Fly

TOKYO (Nikkei)–The latest restructuring measures under consideration for Japan Airlines Corp. go a step further than previous proposals, but with creditors deeply suspicious of the task force compiling the plans, negotiations could turn acrimonious.

The proposed measures aim to clarify what constitutes JAL’s core operations and then ask financial institutions, current employees and retirees to all share the burden of rebuilding the financially strapped airline. Compiled by a government task force overseeing its rebuilding efforts, the rehab plan would entail JAL’s transformation into a leaner and meaner airline that focuses on routes used heavily by business travelers.

And in exchange for streamlining its operations, JAL is to seek assistance from its financial institutions totaling 300 billion yen in debt-for-equity swaps and loan waivers.

Without such drastic measures, JAL is poised to incur an operating loss of more than 190 billion yen in fiscal 2009, according to the task force. By adopting the proposal rehab steps, however, the airline operator would be on track to eventually recover an operating profit of around 50 billion yen.

Creditor banks, however, appear unconvinced so far. On Tuesday, senior executives representing JAL’s biggest lenders, such as the Development Bank of Japan, refrained from commenting on the terms of the rehab plans. With the request for debt assistance at a whopping 300 billion yen and subsequent fundraising plans unclear, creditors believe that the prospect of JAL’s full recovery is still uncertain. The DBJ, which holds the largest loan claims, is strongly opposed to the plans.

While the debt relief plans did not elaborate on whether taxpayer money would be used for the capital increase, JAL creditors believe that public funds will be necessary to shore up the company’s finances. But it is unlikely whether the Democratic Party of Japan-led government would back the use of taxpayer money. Among the options available include a business rehab under an existing industrial revitalization law or assistance under a newly established entity to help support corporate improvements.

The possibility of using a privately mediated workout to shore up JAL is also making the creditors nervous, given this method is designed to protect shareholders and bondholders in exchange for placing a burden on banks. Even if JAL’s big lenders agree, smaller banks with loan claims may oppose such plans.

Some JAL officials and employees are also said to be unhappy about losing control of the rehab effort to the task force, which is spearheading the process. And to be able to implement corporate pension reforms, such as steep cuts to pension payouts, at least two-thirds of retirees need to give their approval.

The task force, however, is not backing down and plans to negotiate aggressively by citing the possibility of legal proceedings, such as a bankruptcy filing. But whether the latest round of measures can win the support of creditors and JAL retirees is still up in the air.

(The Nikkei Oct. 14 morning edition)

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