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Tepco Shareholders May Be Wiped Out After Nuclear Crisis

Tokyo Electric Investors May Be Wiped Out
An aerial handout photograph taken on Thursday, March 24, 2011, from an unmanned airplane, shows Tokyo Electric Power Co.'s Fukushima Dai-Ichi nuclear power plant in Fukushima prefecture, Japan. Source: Air Photo Service via Bloomberg

Tokyo Electric Power Co.’s shareholders may be wiped out by clean-up costs and liabilities stemming from the worst nuclear accident since Chernobyl.

The company faces claims of as much as 11 trillion yen ($133 billion), if the crisis lasts two years, that could lead to nationalization, according to Bank of America Merrill Lynch. Investors, including Mitsushige Akino and Edwin Merner, also said shareholders should brace for further losses.

Tokyo Electric has tumbled more than 70 percent, the worst performer on the MSCI World Index, since the March 11 earthquake and tsunami knocked out cooling systems at the Fukushima Dai-Ichi nuclear plant and caused radiation to leak. Should the crisis persist, the company may be unable to repay bondholders and be taken over by the government, Merrill said.

“Some sort of capital reduction or dilution is inevitable depending on the degree of shareholder responsibility,” said Akino, who oversees about $450 million in Tokyo at Ichiyoshi Investment Management Co., not including Tokyo Electric’s stock. “It’s not yet clear whether it will be down to zero or just halved, but it won’t be what it is now.”

Tepco rose 6.7 percent to 497 yen at 10:17 a.m. on the Tokyo Stock Exchange, snapping a six-day drop that wiped out 58 percent of the company’s market value. The company, valued at 3.5 trillion yen before the 9-magnitude earthquake struck northeastern Japan, is now valued at about 800 billion yen.

Worst-Case Scenario

“We are aware that compensation may be huge and haven’t decided how to make the payment,” said Osamu Yokokura, a spokesman at the utility known as Tepco. He declined to comment on Merrill’s estimate.

Under the “worst-case” scenario, Tepco would be unable to absorb the losses even after a capital reduction and debt-to-equity swap of state-guaranteed debt, Yusuke Ueda, a credit analyst at Merrill, wrote in a report March 29. The utility may face claims of less than 1 trillion yen if the crisis is resolved within two months and as much as 3 trillion yen if it takes about six months, Ueda wrote.

Should claims reach 10 trillion yen to 11 trillion yen, bankruptcy laws may be invoked, Merrill wrote. Still, it’s “very unlikely” Tepco will go bankrupt because of its importance as a provider of electricity, Ueda wrote.

Dai-Ichi Life Insurance Co., Tepco’s second-largest shareholder after Japan Trustee Services Bank Ltd., owns 55 million shares, or a 3.4 percent stake, according to shareholding data compiled by Bloomberg. Based on yesterday’s closing price of 466 yen, the value of those shares had declined by about 83 billion yen in the past three months, more than the 50 billion yen profit Dai-Ichi is forecasting for the fiscal year to March 31.

Spread Widens

The yield on Tepco’s 50 billion yen in 1.814 percent notes due in 2020 rose to a record high 2.492 percent yesterday, according to Japan Securities Dealers Association prices on Bloomberg. The spread widened to 140 basis points from 89 basis points in one day.

“It’s becoming clear that Tepco cannot recover from this by itself, the government’s involvement is very likely, but the question is to what extent,” said Yoshihiro Okumura, who helps manage the equivalent of $365 million at Chiba-Gin Asset Management Co. in Tokyo. “The issue is bigger than Tepco, it has to do with the country’s energy policy.”

Koichiro Gemba, Japan’s national strategy minister, told reporters on March 29 a government takeover of Tepco is something to be discussed.

“There will be a debate on how Tepco should exist or be,” he said. “Containing the situation is necessary more than anything else.”

Hospitalized President

Tepco Chairman Tsunehisa Katsumata, who took charge after President Masataka Shimizu became hospitalized for high blood pressure, yesterday said he wants the power utility to remain out of government control.

Japanese Prime Minister Naoto Kan earlier this week blamed inadequate tsunami defenses at the plant for nuclear crisis, saying that safety standards set by the utility were too low.

“This is not a problem that can be fixed by changing management teams, the very outlook has to change,” said Yuuki Sakurai, president at Fukoku Capital Management Inc., which manages the equivalent of $8.6 billion in Tokyo. “It’s too early to talk about nationalization yet.”

Four of the plant’s six reactors became unusable after sea water was used to cool them. The reactors need to be decommissioned, Katsumata said yesterday, without giving a timeframe.

The damaged reactors need to be demolished after they have cooled and radioactive materials are removed and stored, said Tomoko Murakami, a nuclear researcher at the Institute of Energy Economics, Japan. The process will take longer than the 12 years needed to decommission the Three Mile Island reactor in Pennsylvania following a partial meltdown, said Hironobu Unesaki, a nuclear engineering professor at Kyoto University.

Nuclear Incidents

Japanese authorities rated the Fukushima accident a 5 on the International Atomic Energy Agency’s 7-step scale for nuclear incidents, under which each extra point represents a 10-fold increase in seriousness.

Tepco’s importance as an electricity supplier to the nation’s capital may protect it, according to Yoshihiro Nakatani, a senior fund manager who helps oversee $851 million at Asahi Life Asset Management Co. in Tokyo.

“An increase in the damages figure means deeper involvement by the government,” said Nakatani. “Tepco is guaranteed a stable cash flow as the provider of electricity for Tokyo metropolitan area, so it’s unlikely to being allowed to implode.”

Tepco had cash, near cash and marketable securities amounting to 677.4 billion yen as of Dec. 31. The company had total assets of 13.8 trillion yen, or about 3 trillion yen more than its liabilities.

Debt Ratings Cut

Moody’s Japan K.K. and Standard & Poor’s cut their ratings on Tepco’s bonds on March 18 and put the debt on review for additional downgrades, citing concerns over the nuclear crisis.

The Ministry of Health, Labor and Welfare earlier this week warned that radioactive contamination in food is likely to increase as the result of the disaster. Some 99 products, including milk and vegetables, were found to be contaminated in Tokyo and five prefectures to its north and east as of late March 26, according to the ministry.

“When do you think the nuclear problems can be over? When you know that then you can talk about some kind of nationalization, or recapitalization or restructuring,” said Edwin Merner, Tokyo-based president of Atlantis Investment Research, which manages about $3 billion in assets. “Right now it’s not the problem, the problem is the meltdown.”

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