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TOKYO—Japan Airlines Corp.'s expected bankruptcy filing could wipe out shareholders, cause the value of its bonds to plummet, and alter global investor attitudes toward Japan.
Until now, shareholders had believed that Japan had a governmental safety net and would prop up ailing companies indefinitely. Blue-chip companies such as JAL were thought to be "too big to fail."
"If investors can no longer assume some form of government safety net when investing in Japan, then we have to assume that this would ultimately be reflected in significantly wider corporate spreads than have been the norm to date," said BNP Paribas chief credit analyst Mana Nakazora.
JAL is scheduled to file for bankruptcy following Tuesday's 3 p.m. Tokyo stock market close. Individual shareholders, who accounted for 60% of JAL's 2.73 billion outstanding common shares as of September, will be the hardest hit by the possible subsequent delisting of the airline's stock, which has plunged from a peak of 200 yen ($2.20) last January to a close of 5 yen on Monday.
Hidetaka Miyai, 34 years old, works for a mobile-phone content provider and spent 500,000 yen to buy 1,000 shares at around 500 yen apiece several years ago. "My purpose to hold JAL shares was purely to get discount coupons," he said. Twice a year, the airline issues flight discount vouchers to shareholders, which make the stock attractive to individuals. "I just missed the timing to sell them," he said. "I didn't think JAL would be facing the risk of delisting because it's the national flag carrier, isn't it?"
Even as JAL nears a bankruptcy filing, it is at the center of a tug-of-war between airlines in the Oneworld alliance, to which it belongs, and the SkyTeam alliance led by Delta Air Lines Inc., which is trying to lure it away. Both U.S. carriers believe closer JAL ties will give them access to the carrier's routes in Asia, the world's fastest-growing air market, and are offering JAL financial incentives.
A spokeswoman for Air France-KLM, a leading member of the Sky Team alliance, said the talks "are progressing well."
JAL also is in talks with AMR Corp.'s American Airlines, the leader of the Oneworld alliance.
A delisting from the Tokyo Stock Exchange is the primary concern for the stock market when JAL files for protection from creditors, the Japanese equivalent of Chapter 11 protection, and its rehabilitation process kicks off under the state-backed Enterprise Turnaround Initiative Corp. of Japan.
A key question is whether the rehabilitation plan includes a 100% capital reduction, which would make JAL shares worthless and cause the stock to be delisted. TSE rules stipulate that shares then immediately enter "delisting post", with physical delisting taking place one day after the corresponding day of the TSE's notice in the following month. A TSE delisting announcement made on Jan. 19, for example, would result in delisting on Feb. 20. Market players can still trade in the stock during this one-month period.
Some of JAL's institutional investors already have sold their stake. In November, major trading house Mitsui & Co. said it had sold all of its common shares, while Tokyu Corp., JAL's largest shareholder as of September, said last week that it had sold all of its stake.
While many retail investors rushed to offload their shareholdings late last year, according to local brokerages handling their orders, JAL has recently found many new buyers trying to make quick profit, either on any daily price volatility prior to a bankruptcy protection filing, or on the slim chance that the stock remains listed.
The company's shares have traded heavily all week, with about 550 million shares trading hands Friday. The stock set the TSE single-stock trading volume record Thursday, as more than one billion shares changed hands.
Taro Matsugasako, 29, who works for a trading company, spent 28,000 yen to buy 4,000 JAL shares for seven yen apiece on Wednesday through an online brokerage account he opened in late December. It was his first investment in any stock and he intends to hold onto the shares, in case JAL remains listed.
"In December, I bought 30,000 yen worth of lottery tickets and lost all of it," he said. "I don't mind spending about the same amount on JAL, because I think the chance of winning is at least higher than lottery tickets."
Tomohiro Nakayama, a 26-year-old day trader, is waiting to see if JAL shares fall as low as one yen prior to possible delisting. "That's when I would place massive buy orders, hoping that other people would follow and the shares will be two yen by any chance," he said..
The corporate bond market also is preparing to see a major cut in the value of JAL's bonds. The debt is held by institutional investors, mainly pensions and regional banks.
"It's hard to imagine that JAL bondholders will be protected, as the firm won't be able to find sources to pay for the bonds with a massive debt already on their shoulders, and because major banks are moving to give up their loans to the company," said Yasuhiro Matsumoto, a senior analyst at Shinsei Securities.
The bond market's biggest concern is how much of about 67.2 billion yen outstanding in JAL bonds will be saved. About 47 billion yen of those are conventional bonds, while bonds that can be converted into shares account for about 20.2 billion yen.
Bond players are looking at prices, rather than yields, of JAL corporate bonds in the secondary market, because they are certain that they won't be able to earn coupon income from the bonds.
The key now is how much of JAL bonds will be protected. JAL bonds in recent sessions were being quoted at around 25 yen to 30 yen, compared with their 100-yen face value. That's down from around 50 yen at the end of September, when it asked the government for public funds to boost its capital base. However, Mr. Matsumoto thinks the value of JAL bonds could be cut to less than 20% of face value if JAL applies for court-led rehabilitation.
Still, given the relatively small size of JAL bonds compared to other heavyweights, any direct impact in the overall credit market is likely to be limited even if its corporate bonds do default, analysts said.
—Maarten van Tartwijk and Bart Koster in Amsterdam contributed to this article.
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