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Utilities Seek Record Loans as Fuel Costs Spike: Japan Credit

Utilities Seek Record Loans as Fuel Costs Spike
A Tokyo Electric Power Co.'s (Tepco) electrical substation, right, stands next to electricity pylons in Fukaya City, Japan. The cost of protecting the debt of Tokyo Electric, Kyushu Electric Power Co. and Chubu Electric against default ranked among the country’s six worst-performing credit default swaps over the month to Oct. 5, Bloomberg data show. Photographer: Kiyoshi Ota/Bloomberg

Japan’s top five electric utilities, shut out of the bond market following the Fukushima nuclear disaster, are borrowing a record 4 trillion yen ($52 billion) in loans at a premium to pay for the surging cost of fuel.

Tohoku Electric Power Co., based in the tsunami-damaged northeast, will pay 1.4 percent interest on the 50 billion yen, 15-year loan it clinched on Sept. 30, or a 45.5 basis points spread over the similar-maturity government notes, according to Bloomberg calculations based on company data. Borrowing at that rate, the Japanese utilities would pay an extra 2.6 billion yen in loan interest this fiscal year than they would selling bonds, the calculations show.

Tokyo Electric Power Co., Japan’s largest utility, and its peers are facing lower profit margins as the shutdown of Japan’s atomic plants after the world’s worst accident since Chernobyl has forced the utilities to burn more natural gas and coal to meet demand. The companies are scrambling for alternative sources of financing to replace a net 1.25 trillion yen worth of bonds retired since the March 11 earthquake and tsunami caused uncertainty over the future of atomic energy in the country.

“Reactor shutdowns and the burning of fossil fuel is pushing utilities into the red and forcing the industry to rely on bank loans and short-term financing,” said Kenji Okamoto, a Tokyo-based senior analyst at the corporate finance group of Moody’s Japan K.K. “With so much left to be resolved it’s hard for them to sell bonds.”

Fuel Costs

Japan’s liquefied natural gas and coal imports in the five months to August 31 rose to a record, boosting the country’s import bill for the two main power fuels by 31 percent to 2.45 trillion yen from the same period a year earlier, according to the most recent data compiled by the Ministry of Finance.

There were no bond sales announced by nuclear plant operators in Japan since the quake, Bloomberg data show. The extra yield investors demand to own power company debt instead of similar-maturity government notes soared to a peak of 202 basis points on June 29, from 12 basis points a day before the disaster, according to Bank of America Merrill Lynch data.

The spread narrowed to 39 basis points on Oct. 5, following Tokyo Electric’s win of state support to help compensate Fukushima victims on July 28. Relative spreads on global utilities climbed to 158 basis points, from 111 the day before magnitude-9 earthquake and tsunami slammed the Tohoku regions coastline, damaging the Fukushima plant, Bank of America Merrill Lynch data show.

Chubu Loan

Tokyo Electric’s shares rose as much as 10 percent to 232 yen and traded at 220 yen at the 11 a.m. trading break, leading gains of the country’s utilities stocks today, with Chubu Electric Power Co. climbing as much as 2.7 percent to 1,528 yen.

Chubu Electric, forced to shut its Hamaoka atomic plant, borrowed about 450 billion yen in loans from lenders including state-owned Japan Bank for International Cooperation and the Development Bank of Japan, said spokesman Naohiro Uchikawa. That’s the biggest annual loan amount for the utility in at least 23 years, Uchikawa said.

The nation’s third-largest utility, based in Nagoya in central Japan, raised estimates of its financing needs this year to 550 billion yen from the original 300 billion yen, Uchikawa said, citing an increase in costs for fuel procurement and operation of gas-fired generators.

The 1.09 percent interest rate on the utility’s 100 billion yen 10-year loan inked on Jun 30 carry a spread of 45.93 basis points above government debt, according to Bloomberg calculations based on data provided by the utility.

“A bond sale still is one option for us,” Uchikawa said. “We are making efforts to strengthen our financial stability,” he said.

Reactor Shutdown

The March 11 disaster triggered explosions at the Fukushima plant operated by Tokyo Electric, contaminating soil, waters and forests with radiation. Since then, reactors that were stopped for maintenance remain shut amid government- mandated tests to assess whether the plants can withstand strong quakes, tsunamis or a loss of power to cooling systems.

As of Oct. 6, only 10 of the country’s 54 nuclear reactors were generating power, according to Japan Nuclear Technology Institute data.

“No one can foresee how the existence of Japanese power utilities will change after the Fukushima crisis. This uncertainty would give a certain premium to costs of power bond issuance,” 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.

Sale Scrapped

Kansai Electric Power Co. in June postponed indefinitely a sale of 20 billion yen of 10-year bonds scheduled for that month. The country’s second-largest power company, based in Osaka, delayed the sale due to “market conditions that changed rapidly,” according to an e-mailed statement at the time from Nomura Securities Co., which was arranging the transaction with four other banks.

The cost of protecting the debt of Tokyo Electric, Kyushu Electric Power Co. and Chubu Electric against default ranked among the country’s six worst-performing credit default swaps over the month to Oct. 5, Bloomberg data show. Kansai Electric ranked ninth.

Five-year contracts on Tokyo Electric’s debt have surged 984.7 basis points since March 10 to 1,025 basis points on Oct. 5, according to data provider CMA. Contracts on Chubu Electric rose 322 basis points to 360.

Credit Risk

The Markit iTraxx Japan index of credit-default swaps fell 6 basis point to 225 basis points as of 1:19 p.m. in Tokyo, Deutsche Bank AG prices show. The risk benchmark is on course for its first decline since Sept. 30, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Contracts to insure Japanese government debt against default for five years fell 10 to 149 yesterday.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite. The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

The yield on Japan’s 10-year government bond was at 0.97 percent on Oct. 5, the second lowest of 32 developed markets tracked by Bloomberg after Switzerland’s. Ten-year debt yields 1.84 percent in Germany and 1.89 percent in the U.S.

Funding Shortfall

The yen is the best performer this year so far among the 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes. The yen traded at 76.68 per dollar in Tokyo yesterday, after reaching a post-World War II high of 75.95 on Aug. 19. The Japanese currency was at 102.60 per euro.

Tepco, as Tokyo Electric is known, may have a funding shortfall of 8.6 trillion yen during the next decade if reactors are kept closed and the company fails to raise electricity rates, according to a government panel investigating the utility’s finances.

The panel, formed after the nuclear accident and headed by lawyer Kazuhiko Shimokobe, also estimated Tepco is exposed to at least 5.7 trillion yen in compensation payments and decommissioning costs for Fukushima reactors.

Kyushu Electric, which powers the most southern of Japan’s four main islands, expected to incur a 16 billion yen net loss in six months ended Sept. 30, the company said last month. The utility cited deferred restart of reactors and climbing fuel costs as reasons for the loss.

Turning to Loans

The company sought a 450 billion yen loan from banks including Mizuho Financial Group Inc.’s corporate bank unit and the Development Bank of Japan, two people familiar with the talks said on Sept. 15. Eiji Yamamoto, a spokesman for Kyushu Electric, declined to comment as his company is negotiating with lenders.

On Sept. 8, 17 regional banks, including Nishi-Nippon City Bank Ltd. lent 104.5 billion yen in loans to Kyushu Electric, Yamamoto said.

In Japan’s western region, Osaka-based Kansai Electric said on Sept. 22 that its net income tumbled 69 percent to 24 billion yen in the fiscal fist half. The company plans to borrow 500 billion yen in loans in the year to March 31 from local banks, in part to cover fuel costs, the Nikkei reported on Sept. 27. Yusuke Inoue, a spokesman for Kansai Electric, declined to comment on its bank loan needs.

Tohoku Electric, the utility based in Sendai City near the epicenter of the quake, signed a commitment line for 400 billion yen syndicated loans with local lenders, said spokesman Masumi Nakatsuyama.

“As long as this uncertainty over restart of reactors persists, utilities may have to hinge on bank loans in the next business year,” said Hiroki Shibata, Tokyo-based associate director of the corporate and government ratings division at Standard & Poor’s. “And if this persist for two to three years, their funding may be in trouble.”

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