Money is getting tight as JAL awaits the ETIC decision in January (Photo C. Stewart 2009)

• Updated 05/01/10 at 1400 Local
• Cabinet Minsters Meet with DBJ to secure further funding for JAL- along w/ three of Japan’s biggest banks
• JAL Stock sees its record volume and lowpoint
• How does Japanese Law set out Kaisaha Kousei?
• Who are DBJ, ETIC, and the DICJ really?
• Capital Adequacy found without giving up foreign ownership? 
• So what do we think will happen- with the DBJ and new bank money- Reorg is looking unlikely now!

What a week we have had while most of  Japan has been on holiday!

Minsters Meet with DBP to secure further funding for JAL

While the stock takes a bath, and rumours of the ETIC report leaking just prior to the final day and a half of trading on the 29-30th of Dec,the mood around JAL was not exactly a festive one.    It was highly probable that a draft of the ETIC report was complete as most Japanese will not be at work for even the remainder of this week- so the idea of having it leaked prior to the break seems logical.   ETIC, in their report allegedly state the Corporate Reorganisation Code (In Japanese this is known as Kaisha Kousei or 会社更生法, かいしゃこうせいほう) should be used to turn JAL around.

Against that backdrop Minister Meahara and his cabinet colleagues were in talks over the holiday with DBJ (Development Bank of Japan) officials.  Were they seeking arrangments for  additional funds in place for JAL that missed the supplemental budget? 

On Sunday Japanese Minster for Transport Seiji Maehara told reporters that the Development Bank of Japan will double its credit line for Japan Airlines Corp. to 200 billion yen ($2.2 billion).  In addition the Sumitomo Mitsui Banking Corporation, Mizuho Corporate Bank, and Bank of Tokyo-Mitsubishi UFJ are all commiting to similar amounts. 

Japanese transport minister Seiji Maehara told reporters Sunday the state-owned Development Bank of Japan will double its credit line for Japan Airlines Corp. to 200 billion yen ($2.2 billion).

That should be enough to keep the airline afloat while the government works out details of a bailout for the cash-strapped carrier, government officials said.

“That should be enough to keep the airline afloat while the government works out details of a bailout for the cash-strapped carrier”, government officials said.

Japanese Law and Corporate Reorganisation

As far as the Japanese bankruptcy code, I should be clear that I was using the term DIP previously, and many of my Japanese colleagues have been kind enough to give me a lesson in the legal complexity of DIP and Restructuring.

There is one major difference that I have recently been educated on regarding Japanese Insolvency Laws that now show that my previous, and rather US-centric use of the term DIP were not entirely accurate.

 The first and most important distinction is that the laws were updated in 2000, and at that time several updated concepts were introduced to Japanese law.   One was the concept of Debtor in Possession (DIP) for a Civil Reconstruction, which is available to both Corporations and Individuals.   It is generally a faster and more flexible process than a Corporate Reorganisation.  Unfortunately for JAL,  most experts agree that it is not suitable to their particular situation.

The most suitable form of JAL may only be the Corporate Reorganisation Code, where a court appointed administrator is granted a small stay on debt payment, and then embarks on the same general procedures of U.S. Chapter 11 proceedings with a few minor nuances. The process is strictly prescribed and a great deal of time can elapse prior to the company emerging from administration.   Under the Japanese systems however, it is noted by several prominent experts that this procedure is “both highly reliable, and has an excellent chance of success.”

So in the past, while I have been quoted as saying, “ETIC or The Government” would become the DIP in this case, that was technically inaccurate.   It would be more appropriate to say that under the prescriptive terms of the reorganisation process, the Government would be free to infuse cash as the airline set new terms with its creditors without the need to “possess” (or re-nationalise) the carrier in any direct or overt way.  

The reality, of course, some would say that is exactly what it would be. The largest creditor by far would be the Guarantees of the Japanese government via the DJP and ETIC.   So effectively, DIP it is not wrong- it is just a quirk of Japanese law that make it inaccurate.

Is there an alternative?  I can see one possible longshot

As for the possibility of opening up capital partnership opportunities for other carriers, there looks like there is some behind the scenes movement to do so.

There is also the possibility that if enough capital can be located (which I do not see as the most probable outcome) that they could initiate a Civil Reconstruction.  While this is a much faster process, it would leave the Hatoyama Government in the position to “wean off the carrier” more quickly from state funds.   Frankly this whole idea of changes in foreign ownership laws during a time of Japan exerting its sovereignty again smells funny to me, but politicians have been known to do some fairly strange things when their backs are to the wall- which by the way I do not think Prime Minister Hatoyama is.

So who are all these players like the DBJ,  ETIC and DICJ anyway?

The DBJ is a seperate entity from both the DICJ and ETIC. All three are "semi-governmental" bodies, the latter only having been established in 2009

Sometimes it is best to get it direct from the source:

The Development Bank of Japan Inc. was established on October 1, 2008. Under the terms of the Development Bank of Japan Inc. Law approved by the Japanese Diet on June 6, 2007 .  It was to be a fully private institution, except it was recently allowed to an extention on those plans.  It currently is a state-owned bank.  At the end of fiscal year 2011, the government plans a review of DBJ’s organization which will include the future of government-held shares. The Japanese government will continue to hold its shares until then.

“Enterprise Turnaround Initiative Corporation (ETIC) is a 100% owned subsidiary of the Deposit Insurance Corporation of Japan (DICJ) a semi-governmental organisation.  ETIC was founded in 2009 with the remit to provide support for revitalization of Japanese enterprises operations by assessing their assets, assisting formulation of their operation and finance restructuring plans, coordinating their creditors and other stakeholders, and rendering human and financial support to them, in an impartial and neutral manner.”

Ah, well, that clears that up.  They are all three semi-independent governmental bodies. 

What about all these alliance offers?

It remains unclear that if JAL does enter into a Corporate Restructuring which of either offer would be more useful or welcome to ETIC.   It could be that more fundamental issues are addressed first, and then the question of alliances would come in at a later time.

It is being widely reported that both “are still in talks”, and even some news outlets are reporting that one has been selected- SkyTeam/Delta.   Now, if this were true, let have a look at some of the reasons why that could be the case.

I don’t think that  AMR has not made any friends in Japan, particularly in the early days of their overtures.    In my opinion Delta and SkyTeam only fared marginally better, and stopped short of what I called in some of my previous blogs naked threats.    

One of the more interesting quotes of this week came while attending a friends New Years Celebrations He asked me “If TPG are high-end airline investors, then why did they sell Midwest to Republic?  They had ample time to do what Republic has done, and make it a success, did they not?  What do we know of their true core skills and intentions?”

The man has a point.

So what do we think will come of all this in the end?

I don’t think we will see a firm decision made until after the 12th of January.  On Monday JAL said that more than two-thirds of its current employees have agreed to accept the company’s proposal to cut pension benefits substantially as part of efforts to turn the struggling carrier around. Around 11,800 of the approximately 16,000 employees had responded positively to JAL’s proposal .  At this time it is unclear if the company’s retirees will accept the proposed pension benefit cuts in a similar vote.
I have the highest respect for the men and women of JAL.  As a person who has stood on the precipice with my colleagues and watched two of the three major carriers I have worked for take their last flight,  I find my thoughts returning to how the employees must be feeling.  All of this uncertainty at a time where they were culturally in Japan there is a celebration to end and even ”forget” about the past year.   For thousands that was not possible this New Year.   My thought go out to them, and what they must be feeling.  

Japanese Prime Minister Yukio Hatoyama (Reuters)

For my money, I see JAL at the fork in the road.   The alleged ETIC recommendation to employ Corporate Reorginasation is the strongest possibility, and most likely.  Prime Minister Hatoyama, and his cabinet, however appear  at least ready to make a political move and step in to save JAL from the process.  The fact that three of Japan’s biggest banks are also willing to put up the cash says that we should watch out for something other than the Corporate Reorganisation- or it could just be DIP money.   Whichever way he, and his cabinet, choose to go will be a clear signal not just to JAL- but to Japan- about the futuer of his time in Government.   Make no mistake, however, the Japanese are clearly in control here.

Carter Stewart, is a Pricipal  at TWC Aviation Consulting- an aviation consulting firm headquartered in London.

At the time of this article, the author did not have any shareholdings or active contracts with any of the companies covered in the scope of the work.

Copyright TWC Aviation 2009  – TWC Aviation 2009

Photo Credits:  C. Stewart, Copyright 2009 (unless otherwise attributed)