20-Jan-2010 8:41 AM

Japan Airlines bankrupt; To commence corporate reorganisation proceedings

Japan Airlines Corporation, Japan Airlines International Co Ltd and JAL Capital Co Ltd filed (19-Jan-2010) jointly with the Development Bank of Japan (DBJ), Japan Bank for International Cooperation, Mizuho Corporate Bank Ltd, The Bank of Tokyo-Mitsubishi UFJ Ltd and Sumitomo Mitsui Banking Corporation, submitted an application to the Enterprise Turnaround Initiative Corporation of Japan (ETIC) for support for restructuring and received the decision from ETIC to provide support. JAL also filed the petitions for commencement of corporate reorganisation proceedings with the Tokyo District Court. The Court entered an order commencing the proceedings and appointed ETIC and Eiji Katayama as reorganisation trustees. Details include:

  • DIP financing: JAL will be able to obtain the DIP financing from DBJ and ETIC, the amount of which will be "sufficient" to continue business;
  • Continued of operations: The continuation of the group's flight operations will not be interrupted and requested that customers' frequent flyer miles be protected under the Corporate Reorganisation proceedings;
  • Outlook: JAL stated it believes "business revitalisation is sufficiently feasible" through the adoption of the following measures:
    • Renewal of Aircraft and Reviewing Airline Routes: JAL will shift from low-efficiency large aircraft to high-efficiency small aircraft, as well as regional jets. The carrier will also restructure and consolidate underperforming routes;
    • Review of the Workforce and Organization Structure: JAL believes the following measures are necessary: the streamlining of headquarters; improvement of productivity by adjustment of the workforce; establishment of a new management system; 
    • Establishment of the Business Operation System Optimising Revenue: JAL believes the following measures are necessary: establishing an operating system maximizing revenue by flexibly and swiftly planning flight routes/aircraft schedules in response to demand changes; conducting business operations under the Open Sky Policy by leveraging its alliances to expand its network, in addition to structuring flight routes to match business demand; establishing a low-cost flight service model domestically;
    • Focused Investment to Realise Business Strategy: Believes a "significant" amount of investment is necessary for the renovation of aircraft as necessary to maintain competitiveness. Investments is also required in ground infrastructure, such as IT systems, according to the carrier;
    • Restructuring of the Pension System: JAL receives consent more than two thirds of each of pension rights holders (former employees) and current employees, and consent from the JAL Labor Union regarding the significant reduction in pension payments. A reduction in of pension payments will be carried out subject to the approval of the Minister of Health, Labor and Welfare.;
    • Management: JAL's Representative Director and President, Haruka Nishimatsu, has resigned "in order to take responsibility as the management for causing our current situation". It is also expected that all of other Drectors will resign. The new management structure will be determined in early Feb-2010. Meanwhile, it is expected that Masato Uehara, the Senior Managing Executive Officer, will be the Group Temporary COO. [more - JAL Statement]

Other key aspects of JAL's filing include:

  • Debts/Credit facility details: JAL reportedly filed for bankruptcy protection owing USD25.6 billion and will remain operational due to approximately JPY900 billion (USD10 billion) in financial support, with ETIC reportedly providing approximately JPY300 billion (USD3.3 billion) in capital and a JPY600 billion (USD6.6 billion) credit facility (Yomiuri Shimbun/Reuters/Wall Street Journal, 19-Jan-2010). JAL’s lenders will reportedly forgive a larger-than-expected JPY730 billion (USD8 billion) in debt, as part of the restructuring agreement. Meanwhile, Mizuho Financial Group, Japan's second-largest bank by assets, stated its corporate banking arm may be unable to recover JPY95.1 billion (USD1.1 billion) in loans to JAL and its subsidiaries (Reuters/Dow Jones, 19-Jan-2010). Mizuho stated it would book the necessary changes to the value of the debts and JAL shares held by the group in its financial results;
  • Shares: JAL’s shares will be delisted on 20-Feb-2010, according to the Tokyo Stock Exchange, meaning equity investors will lose their investments. The carrier’s shares have fallen more than 90% since the start of the month;
  • Operational changes: JAL reportedly plans to cut almost a third of its workforce (approximately 15,700 workers to 36,201), 31 routes (14 international routes and 17 domestic routes) and 53 aircraft, including 37 B747-400s and 16 MD-90s (Bloomberg, 20-Jan-2010);
  • Liabilities: JAL has reportedly left liabilities of JPY2.3 trillion on a group basis after filing for court-led restructuring (Dow Jones, 19-Jan-2010). It is the largest amount among non-financial companies in corporate post-war Japan, according to Teikoku Data Bank;
  • Advisors: ETIC is reportedly considering appointed Nomura Holdings and Deutsche Bank to advise on JAL’s bankruptcy (Bloomberg, 19-Jan-2010);
  • Fuel hedging contracts: Fuel hedging contracts may also be affected by the filing (Reuters, 18-Jan-2010). JAL uses mostly Brent forward contracts and approximately JPY40 billion (USD439 million) is reportedly estimated to be exposed in the event of an automatic termination;
  • International partners: JAL has yet to make a decision about a future international partner (Reuters, 19-Jan-2010);
  • Bonds: The treatment of bondholders will reportedly be decided by the Tokyo District Court (Wall Street Journal, 18-Jan-2010). The carrier has reportedly defaulted on JPY67 billion (USD740 million) of bonds following its bankruptcy filing (Bloomberg, 19-Jan-2010);
  • Derivatives: International Swaps & Derivatives Association stated a request by UBS to rule on whether payments on credit-default swaps written on JAL’s debt should be triggered by the bankruptcy filing was accepted by a committee of 15 dealers and investors that governs the derivatives (Bloomberg, 19-Jan-2010). The Determinations Committee will meet to make a ruling on 21-Jan-2010.

Japan Airlines: ''We have been given a final chance by the government, financial institutions, shareholders and the general public. 'I am confident we will revive as a strong airline company that will once again represent Japan,''  Haruka Nishimatsu, former President. Source: Kyodo, 19-Jan-2010.

Japan Airlines: "While receiving the support from ETIC and sound assistance from related parties including the Japanese government, and under the supervision of the Court and the leadership of the Trustees, we are confident that the swift revitalization of JAL Group will be achieved after which JAL Group will be reborn as a leading airline group that could again lead the global airline industry," Company Statement, 19-Jan-2010.

ETIC: ''It is important to obtain public understanding when injecting a massive amount of government funds. It is essential to ensure that the rehabilitation process is fair and just, as well as transparent,” Hiroshige Nishizawa, President. Source: Kyodo, 19-Jan-2010.

Japan Airlines: "JAL's corporate restructuring will proceed swiftly under sound procedures through the combination of receiving support from ETIC and in-court corporate reorganization proceedings. Commercial transaction claims and the frequent flyer miles will be fully protected," Company Statement, 19-Jan-2010.

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