Tepco Bond Risk Surges on Edano Loan Waiver Call: Japan Credit

Tepco Bond Risk Surges on Edano Loan Waiver Call
A sign for Tokyo Electric Power Co. is displayed outside the company's local sales office in Fukaya City, Saitama Prefecture, Japan. Tepco faces compensation claims of as much as 11 trillion yen ($144 billion) after three reactor meltdowns at Fukushima, about 220 kilometers (137 miles) north of Tokyo, and helped tip the world’s third-largest economy into recession. Photographer: Kiyoshi Ota/Bloomberg

Bond prices show creditors will have to share the bill for Japan’s nuclear crisis after the new minister responsible for power companies said banks should write off some loans to Tokyo Electric Power Co.

Five-year credit-default swaps on the utility, whose Fukushima Dai-Ichi plant was wrecked by the March 11 earthquake and tsunami, surged a record 271.9 basis points last week to 887.9 basis points after Yukio Edano repeated calls for investors to help pay for the costs of the disaster, according to CMA. Contracts on the power company are the most expensive relative to global peers since June 28, the data show.

Tokyo Electric, or Tepco, faces compensation claims of as much as 11 trillion yen ($144 billion) after three reactor meltdowns at Fukushima, about 220 kilometers (137 miles) north of Tokyo, and helped tip the world’s third-largest economy into recession. Edano, 47, the chief of staff for the previous government, first called in May for banks to forgive some loans made before the quake. He was appointed head of the Ministry of Economy, Trade and Industry on Sept. 12.

“We really have to consider the risk that Edano will push for a loan waiver,” said Hiroshi Nakamura, who helps oversee 3.5 trillion yen in assets as general manager of fixed-income investment in Tokyo at Mizuho Asset Management Co. “He shouldn’t say anything that might destabilize the market anymore.”

Bondholder Protection

The cost of protecting Tokyo-based Tepco’s debt from default surged more last week than in the immediate aftermath of the temblor, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Contracts rose 239.5 basis points to 280 in the week to March 18, and peaked at 1,000 on June 7.

Credit-default swaps, which pay the buyer face value if a borrower fails to meet its obligations, fall as perceptions of creditworthiness improve and rise as they deteriorate. A basis point equals $1,000 annually on a contract protecting $10 million of bonds and loans.

Elsewhere in Japan’s credit markets, the yield on the nation’s benchmark 10-year bond was little changed at 0.985 percent today, after touching 0.97 percent on Aug. 19, the lowest since November, according to Japan Bond Trading Co. Ten-year Treasury yields slid to a record 1.877 percent on Sept. 12.

Corporate Bonds

Spreads on Japanese corporate bonds, excluding the debt of power companies and banks, rose 1 basis point yesterday to 22, after reaching a post-quake high of 27 on May 11, according to Bank of America Merrill Lynch’s Japan Industrial Index.

The Markit iTraxx Japan index of credit-default swaps declined 1 basis point to 187 basis points as of noon in Tokyo, Deutsche Bank AG prices show. The latest series of the benchmark started trading yesterday, with contracts on Chubu Electric Power Co., Kawasaki Kisen Kaisha Ltd. and Softbank Corp. replacing ones on Canon Inc., Komatsu Ltd. and Mitsui Chemicals Inc., according to Markit Group Ltd.

Contracts to insure Japanese government debt for five years declined 1 basis point to 126 basis points, according to Deutsche Bank prices.

Tokyo Metropolitan Government hired Bank of America Corp., Deutsche Bank AG and Citigroup Inc. to help organize a series of credit investor meetings in Asia from Oct. 13. The municipality is visiting Hong Kong and Beijing before deciding whether to sell five-year, dollar-denominated debt, said Yoshiko Aida, a director of the bond unit at the government.

‘Competitive’ Funding

“Based on the market conditions, we have been looking for currencies in which we can sell bonds,” Aida said yesterday in a telephone interview. “Funding in dollars after swapping into yen now will be as competitive as funding in yen. Until recently, yen was much cheaper.”

The sale would be Tokyo Metropolitan’s first dollar offering since February 2001, when it raised $170 million in 10-year, 6.125 percent bonds, according to data compiled by Bloomberg.

Tepco has 4.6 trillion yen of bonds outstanding, or 7.5 percent of the market, according to data compiled by Bloomberg. A net $505 million of protection on Tepco, the biggest corporate issuer in Japan, was outstanding as of Sept. 16, the latest data from Depository Trust & Clearing Corp. show.

The extra yield investors demand to own Tepco’s 30 billion yen of 1.155 percent bonds due September 2020 instead of similar-maturity government debt rose 40 basis points this month to a record 467 yesterday, according to Japan Securities Dealers Association prices. Spreads on Tepco’s 4.5 percent euro denominated notes due in 2014 widened 198.2 to 1,166.6 over the euro swap rate, BNP Paribas SA prices show.

Compensation Claims

Tepco may face compensation claims of as much as 11 trillion yen, Bank of America Merrill Lynch estimated on March 29. Legislation approved by parliament on Aug. 3 created a state-backed entity to pay damages associated with the atomic accident with “necessary cooperation from shareholders and other interested parties.”

“The purpose of using tax money to aid Tokyo Electric doesn’t include the protection of creditors and shareholders,” Edano told reporters in Tokyo on Sept. 13. “They should bear costs they would have been liable for if there wasn’t support from the government.”

Edano, who led daily briefings on the disaster as chief cabinet secretary, will participate in the government’s response to the worst nuclear crisis since Chernobyl 25 years ago. He will oversee reforms at the ministry after former trade minister, Banri Kaieda, fired three top energy officials.

Tepco Creditors

Tepco has 3.28 trillion yen of loans due in a year or more, according to a June 29 filing with the government. The utility owes Sumitomo Mitsui Banking Corp. 769.5 billion yen in loans, 581.8 billion yen to Mizuho Corporate Bank Ltd. and 349 billion yen to Bank of Tokyo-Mitsubishi UFJ Ltd.

“We have repeatedly said we wouldn’t accept forgiveness of loans to Tepco if we are asked to do so,” Katsunori Nagayasu, head of the Japanese Bankers Association and chief executive officer of Mitsubishi UFJ Financial Group Inc., said at a news conference in Tokyo Sept. 15. Banks have already given support to Tepco after the disaster, including 2 trillion yen of emergency loans, he said.

The nuclear reactors will be brought under control by the end of the year, a government official said on Sept. 19 in an assessment backed by the United Nations’ atomic agency.

Standard & Poor’s cut Tepco’s credit rating by five levels to B+, the fourth-highest non-investment grade, on May 30, citing a likelihood that banks may restructure some of the utility’s debts.

Tepco is considering job cuts and reshuffling some positions, spokesman Naoki Tsunoda said in a phone interview today. No concrete details have been decided yet, Tsunoda said, responding to media reports. Tepco told a government committee yesterday that it will eliminate as many as 5,000 jobs, national broadcaster NHK reported, citing an unidentified person.

Government Support

There is a high chance the utility will still receive “extraordinary government support,” Hiroki Shibata, a Tokyo-based associate director for S&P covering power firms, told reporters Sept. 15. Edano’s talk of a loan waiver is “just his personal view,” Shibata said.

Japan’s economy is still reeling from the earthquake, with gross domestic product contracting in the second quarter by more than the government estimated, the Cabinet Office said Sept. 9.

S&P cut its forecast last week for Japan’s growth in 2011 to about zero, saying the yen may undermine a recovery from the temblor. The currency rose to a post-World War II high of 75.95 per dollar on Aug. 19, threatening to derail any export-led recovery. It traded at 76.36 at 2:35 p.m. in Tokyo.

Overseas shipments increased 2.8 percent in August from the same month a year earlier, the first increase since the March 11 earthquake, according to a Ministry of Finance report from Tokyo today. The gain was slower than the lowest forecast of 22 economists surveyed by Bloomberg New, whose median estimate was for an 8 percent increase.

Default Risk

One-year default-swaps on Tepco’s debt rose 626.2 last week to 1,756.4, the biggest weekly increase since the five days ending June 10, CMA prices show. The contracts are pricing in a 29 percent chance of default within a year, assuming a 35 percent recovery for bondholders, Bloomberg data show.

Five-year contracts on utility companies worldwide, including Charlotte, North Carolina-based Duke Energy Corp. and Korea Electric Power Corp., rose 5 basis points last week to 169.3 basis points and were last at 173.4, Bloomberg data show.

“As a minister, Edano needs to be held responsible for his remarks,” said Tomone Kawachi, chief investment officer at WERU Asset Management Co., a Tokyo-based investment advisory firm. “I’m not sure if he’s just being stubborn or if he’s really serious about cutting debt, but I don’t think he can do it in a practical sense.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE