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Tepco Disaster Propels Sales of Commercial Paper: Japan Credit

Tepco's Fukushima Dai-Ichi nuclear power
Tokyo Electric Power Co.'s Fukushima Dai-Ichi nuclear power plant stands damaged after the tsunami in Fukushima prefecture, Japan. Source: Air Photo Service via Bloomberg

Short-term borrowing with commercial paper reached an 18-month high in Japan, after the country’s worst nuclear disaster in 25 years raised the cost of selling bonds for power producers.

Commercial paper outstanding reached 16.4 trillion yen ($211 billion) on July 22, the highest since the week ended Jan. 15, 2010, according to Japan Securities Depository Center Inc. Issuance by electric power and gas utilities totaled 1.04 trillion yen, the most since 2009, more than quadrupling since the March 11 disaster. U.S. non-financial companies have $189 billion outstanding in America’s commercial paper market, up 55.8 percent from Dec. 31, according to Federal Reserve data.

Utilities sought short-term IOUs after investors demanded 40 basis points more in yield to own power company bonds than the nation’s government debt. That’s up from 12 basis points before a tsunami caused meltdowns at a nuclear plant, according to Bank of America Merrill Lynch’s Japan Utility Index.

“Utilities have been boosting commercial paper issuance since it became clear around May to June that bond sales would be difficult,” said Hiroshi Seki, a market economist at Tokyo Tanshi Co., a money market brokerage affiliated with ICAP Plc.

Kansai Electric Power Co., which relies on nuclear power for about half its output, last week reported commercial paper rose eightfold to 239 billion yen in the quarter ended June 30, the highest in eight years, according to spokesman Masanori Tanaka. The company, which postponed bond sales in June, cited payment of corporate taxes and dividends for the increase in commercial paper debt.

Record Loss

Commercial paper at Chubu Electric Power Co., which also delayed a bond sale in June, almost doubled to 213 billion yen in the period, its highest level in two years. The company, which was ordered in May to shut operations at its Hamaoka nuclear plant to address safety concerns, had 112 billion yen in commercial paper last quarter.

The electric companies are facing a shortfall in power supply as almost two-thirds of the country’s reactors are shut for maintenance and must be tested before restarting.

Kansai Electric last week withdrew its full-year sales and profit outlook while Chubu Electric forecast a record 52 billion yen net loss. The utilities cited the impact on earnings from power-savings measures and the shutdown of reactors.

Kyushu Electric Power Co. increased commercial paper sevenfold to 210 billion yen last quarter from the previous three-month period, while Shikoku Electric Power Co. more than tripled its outstanding balance to 43 billion yen. Commercial paper at Hokkaido Electric Power Co. more than doubled 43 billion yen, the company said last week.

‘Extra Financing’

“Taking into account the uncertain environment following the disaster, the company decided to secure extra financing,” said Kazuhiro Ohtomo, a spokesman for Hokkaido Electric. Ohtomo declined to give further details.

Commercial paper typically matures within 270 days and is used to finance a company’s everyday activities such as payroll and rent.

Tokyo Electric Power Co., the operator of Fukushima Dai-Ichi nuclear plant damaged by the March 11 disaster and previously the largest borrower in the market, has no commercial paper outstanding.

Japan’s government drafted a law last week calling for electric power companies to fund a state-organized body created to handle claims against Tokyo Electric. At the same time, the government ordered so-called stress tests in July, causing delays to restarting nuclear reactors idled for maintenance.

That forced utilities to postpone bond sales, except for Okinawa Electric Power Co., Japan’s only regional power producer without a nuclear plant.

Nuclear Shutdowns

Prime Minister Naoto Kan on July 13 pledged to reduce Japan’s reliance on nuclear energy -- an about face for an economy that depended on atomic power for up to 30 percent of its needs last year.

“We should reduce nuclear dependency in a planned, step-by-step manner,” he said. “We should eventually create a society where we can do without atomic energy.”

Of Japan’s 54 reactors, 38 are idled or inactive after the March 11 earthquake and tsunami caused three meltdowns at Fukushima plant.

Utilities will likely continue to issue commercial paper to pay for rising fuel costs, as oil prices remain high and as reliance on thermal power increases due to shutdowns of atomic plants, Tokyo Tanshi’s Seki said.

Power companies may not be able to fully pass on higher energy costs to customers, eroding their earnings and leading to risk of a credit rating downgrade, said Soichi Okuda, chief economist at Sumitomo Shoji Research Institute in Tokyo.

Credit Ratings

Chugoku Electric Power Co. said it will have a 4 billion yen net loss in the six months ending Sept. 30, compared with a profit of 1.2 billion yen a year earlier, because of higher fuel costs.

Rating & Investment Information Inc., a Japanese credit rating company, cut the debt grades of eight regional utilities in June.

Electric utilities have to pay higher rates to issue commercial paper than other companies. Three- to six-month CP rates for utilities with the highest a-1 plus credit rating were 0.22 to 0.26 percent in mid-June, double from pre-quake levels, according to Tokyo Tanshi. Even amid general declines in rates in July, some power producers issued short-term IOUs at 0.16 percent, higher than 0.11 to 0.12 percent for electronics and leasing companies with the lower a-1 rating.

Lower Than U.S.

Three-month commercial paper rates for companies with the second-highest credit rating are 0.115 percent in Japan, compared with 0.28 percent to 0.31 percent in the U.S. Rates on three-month commercial paper are 1.5 basis points more than those on similar-maturity government bills in Japan, compared with spreads of 21 basis points in the U.S.

The Bank of Japan quadrupled purchases of commercial paper to 2 trillion yen in the wake of the March 11 quake. The bank’s purchases of commercial paper totaled 1.7 trillion yen on July 20, accounting for 10 percent of Japan’s total issuance outstanding.

“It’s clear the BOJ’s commercial paper purchases are supporting utilities’ fund raising,” Tokyo Tanshi’s Seki said.

If power producers can’t sell bonds, they may have to depend more on short-term borrowing, including bank loans, Sumitomo’s Okuda said.

Power shortages and higher costs from the shutdown of nuclear plants may prompt more Japanese companies to move production overseas. The yen’s appreciation, up 11.5 percent against the dollar in the past 12 months, and concerns over power supply may hasten the shift abroad, Bank of Japan board member Hidetoshi Kamezaki said on July 27.

“We’ll face an ‘electricity deflation’ if power demand decreases while we conserve energy,” said Tokuyoshi Takano, a financial derivatives manager in Tokyo at Mitsui Sumitomo Insurance Co. “The government and the BOJ should set up a framework to help power producers raise funds.”

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