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Tepco’s State Support at Odds With Market Seeing Bankruptcy

Tepco Fukushima
A handout photograph shows Mike Weightman, the U.K.'s chief inspector of the Nuclear Installations and International Atomic Energy Agency (IAEA) fact-finding team leader, examining Reactor Unit 3 at Tokyo Electric Power Co.'s (Tepco) Fukushima Dai-Ichi nuclear power station in Fukushima, Japan. Photographer: Greg Webb/IAEA via Bloomberg

The Japanese government’s commitment to support Tokyo Electric Power Co. contrasts with investors selling its shares at a record pace and betting on a 54 percent likelihood the utility will default on its debt in five years.

Liquidating Tokyo Electric would cause huge problems and must be avoided, Chief Cabinet Secretary Yukio Edano said yesterday. The company’s shares fell an unprecedented 28 percent to 207 yen yesterday after the head of the Tokyo Stock Exchange said it needs to be restructured. The stock rose today.

Political bickering over the future of Prime Minister Naoto Kan has cast doubt over whether his administration can implement its plan to ensure that Tokyo Electric compensates victims of a disaster at its atomic plant. Tepco, as the utility is known, has slumped 90 percent, erasing about 3.1 trillion yen ($39 billion) in market value, since a March 11 earthquake and tsunami triggered the worst nuclear crisis in 25 years.

“Speculation that it’s just a matter of time before Tepco goes bankrupt has been dominating the stock market, in stark contrast with the government’s efforts to keep it alive,” said Yasuhide Yajima, an economist at NLI Research Institute in Tokyo. “The market doesn’t trust the government’s ability to move ahead with plans to keep Tepco afloat.”

The cost of insuring Tepco’s debt for five years was 1,000 basis points today, or 100 million yen a year to protect 1 billion yen of debt, according to Bank of Scotland Group Plc prices in Singapore. The credit-default swaps showed a likelihood of a default in five years at 54 percent. Tepco has 6.83 trillion yen of bonds and loans outstanding.

‘Major Problem’

“Claims held by parties dealing with the accident, and especially those held by small and medium-sized businesses, must be protected,” Edano told reporters in Tokyo. “If a court-led bankruptcy were to occur, it would be a major problem because neither of these two classes of claims would fall under the category of preference claims.”

His remarks may give a short-lived boost to the utility’s shares, “but in the long run they’ll approach zero as the company’s fundamentals won’t change,” said Mitsushige Akino, Tokyo-based chief fund manager at Ichiyoshi Investment Management Co. “It’s a money game as all participants are speculative investors now.”

Tepco rose 4.4 percent to 216 yen at the close of Tokyo trading today. The extra yield that investors demand to hold the company’s 1.155 percent bond due in 2020 widened to a record 416 basis points more than government debt yesterday from 13 before the quake, Japan Securities Dealers Association prices show.

Like Japan Airlines

The utility may post a full-year net loss of about 570 billion yen on a parent basis for this fiscal year, the Tokyo Shimbun reported yesterday, citing an internal document from the company. Tepco said it wasn’t the source of the report. It posted a loss of 1.25 trillion yen in the year ended March 31, the biggest on record for a non-financial firm in Japan.

Tokyo Stock Exchange President Atsushi Saito said the company needs to be restructured along the same lines as Japan Airlines Co., which filed for bankruptcy protection, the Asahi newspaper reported on June 4.

Saito’s comments echoed those of Shigeaki Koga -- an official in the Ministry of Economy Trade and Industry, which oversees the nuclear power industry. Koga said in a 14-page memo on May 11 that Tepco is unable to pay compensation for the nuclear disaster alone and a company that can’t meet its financial obligations should file for protection.

Three Meltdowns

The cost of dismantling the Fukushima Dai-Ichi plant may reach 20 trillion yen, and compensation for households in a 20-kilometer evacuation zone may total 630 billion yen over 10 years, according to the Japan Center for Economic Research.

Tepco’s nuclear station suffered three reactor meltdowns after the earthquake and tsunami knocked out power and backup generators, crippling its cooling systems. The melted fuel may have leaked through the pressure vessels of reactors 1 to 3, the Yomiuri newspaper reported today, citing a report the government is preparing to submit to the International Atomic Energy Agency.

Radiation emitted by the plant in the days after the quake was higher than initially estimated, Japan’s nuclear safety agency said yesterday. The agency doubled its estimate of radiation released between March 11 and March 16 to about 770,000 tera becquerels.

The government last month said it will create an agency to handle claims made against Tepco and will issue bonds to fund them. The utility accepted the conditions set by the government, which include unlimited liability on payments for damages.

Kan’s Promise

Prime Minister Kan last week survived a no-confidence vote after promising to step down at an unspecified time once the disaster is contained. Lawmakers from his Democratic Party of Japan including ex-premier Yukio Hatoyama said Kan lacks the popular support needed to pass legislation for rebuilding from the March natural disasters and nuclear crisis.

A government committee began meeting today to investigate the nuclear accident, with the head of the panel saying the probe isn’t a witch hunt and it would be impossible to learn the truth if the people involved fear being held responsible.

“We shall strive to get a big picture of the accident that will be of use in the future,” Yotaro Hatamura said. “We would also like to create a body of knowledge that will help in drawing up plans for preventing accidents of this type.”

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