A state-backed fund crafting a restructuring plan for Japan Airlines <9205.T> is leaning toward a delisting of the carrier after it files for bankruptcy, a source with knowledge of the matter said.

The fund, called the Enterprise Turnaround Initiative Corp of Japan (ETIC), has been considering a plan that would allow Japan Airlines to keep its listing on the Tokyo Stock Exchange, sources told Reuters last week.

The fund is still debating the issue but a delisting is currently its main scenario as it seeks to hold shareholders accountable for the carrier's downturn along with creditors being asked to forgive debt, the source said.

The source was not authorized to speak publicly about the issue. The ETIC declined to comment.

The ETIC has proposed to JAL creditors that the carrier's restructuring include it filing for bankruptcy protection under the Corporate Rehabilitation Law, a process similar to Chapter 11 in the United States, sources have told Reuters.

Normally that would lead to a complete reduction of capital, wiping out the value of a company's shares.

But the ETIC has been considering a plan for a small portion of its capital -- at maximum a few percent -- to be retained. That would allow JAL to remain listed even after a bankruptcy filing, which sources say could come as early as January 19.

A delisting is right now the main scenario, the source said. But both options are still being considered and a final decision has not been made.

JAL's creditors, which include Mitsubishi UFJ Financial Group <8306.T>, Mizuho Financial Group (MUFG) <8411.T> and Sumitomo Mitsui Financial Group <8316.T>, are keen for JAL to keep its listing so as not to entirely wipe out their shareholdings.

The core banking units of MUFG and Mizuho are among JAL's top stockholders in terms of both common and preferred shares.

NEW MANAGEMENT

For its part, the ETIC is concerned over the potential business impact of a delisting. A good portion of JAL's stock is in the hands of individuals, which hold the shares for fare discounts and other incentives.

The prospect of JAL keeping its listing is one of the factors supporting its stock. The carrier still has a market value of about $2 billion even as the likelihood of a bankruptcy grows.

The Tokyo Stock Exchange revised its rules in 2003 to allow companies that had filed for bankruptcy protection to retain their listing if they met certain criteria, one of which is that they do not implement a complete reduction of capital.

But until now no company that has applied for protection under the Corporate Rehabilitation Law has kept their stock listing. JAL would be the first case.

Even if JAL were able to keep its listing, the carrier's existing shareholders will likely see the value of their stock diluted significantly if it wins the support of the ETIC.

The ETIC plans to inject about 300 billion yen in fresh capital into JAL, provided it goes through with the bankruptcy filing and banks agree to waive 350 billion yen in debt, sources have said.

Even as it appears headed for bankruptcy, Delta Air Lines and American Airlines have been courting JAL with rival offers of financial aid and close ties on overseas routes.

The ETIC will not invite either U.S. carrier to invest in JAL at this stage as it believes a decision on its overseas partner should be left to new management, a source told Reuters.

Bringing in either Delta or American as shareholders could also complicate the ETIC's efforts to exit its investment, which it must do in 3 years.

($1=92.25 Yen) (Editing by Muralikumar Anantharaman)

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