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JAL speeding up restructuring efforts: Is a debt-for-equity swap with a major lender in the works?

June 22, 2007
By Ken Worsley


In an excellent piece published on Thursday, the Wall Street Journal warned that despite the steps toward restructuring that Japan Air Lines has announced, investors may want to wait for a clearer path to emerge before buying shares in Japan’s largest air carrier.

At issue is the fact that although JAL needs cash to buy new, more fuel-efficient airplanes, banks are reluctant to extend loans to a firm carrying debt that is 75 times greater than its operating profit, at $13.78 billion. Then we get the rumor:

[I]n a sign of tough times, last month it asked its banks to give up part of their debt in exchange for nonvoting shares in the company, people close to the situation say.

Such a debt-for-equity swap would certainly be risky for the banks, amidst the rising trend for shareholders to pressure banks not to provide large firms with financial bailouts simply based on who they are. For more detail on this, the WSJ article is the best place to go.

What I want to get to is a Nikkei report that JAL has decided to speed up some of its restructuring plans. It will apparently cut 4,300 jobs by the end of fiscal 2008, a year earlier than originally planned. It will also begin asking flight attendants to “retire” during this fiscal year, is looking to cut retirement benefits by 10%, and is considering cutting its entire workforce by 10% by the end of fiscal 2009.

When I saw all this, I figured at least one of their major banks must have been interested in the debt-for-equity swap. The Nikkei article finishes with the vague line, “As it scrambles to improve profitability, the airline hopes that such steps will curry favor with financial institutions and other lenders.”

We’re still wondering which financial institutions are going to risk raising the ire of shareholders. JAL’s largest lender, the state-owned Development Bank of Japan doesn’t have nearly as much to worry about as Mizuho Corporate, Mitsubishi UFJ and Mitsui Sumitomo (JAL’s other big lenders) do.

Just as pressing is whether or not the interested parties are going to demand deeper restructuring commitments from JAL.

Filed Under Airlines, Business 

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Comments

One Response to “JAL speeding up restructuring efforts: Is a debt-for-equity swap with a major lender in the works?”

  1. J-Dog on June 24th, 2007 12:09 am

    JAL’s management is just plain sad not to be making heaps of cash. They have almost no competition in a huge market where the government has basically nominated them as the market leader. And they end up with a debt like that, despite extortionary pricing. I don’t get how anyone on the board still has a job.

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