Tokyo Electric Power Co., the company at the center of the worst nuclear crisis since Chernobyl, isn’t likely to be downgraded to BBB+ by Japan Credit Rating Agency Ltd., as the government bailout bolsters its business, according to BlackRock Inc.
Tokyo Electric, known as Tepco, plans to deliver a business restructuring plan this month as the company may face 4.5 trillion yen ($56 billion) in compensation payments by March. Companies need at least one risk assessor to give them a grade above BBB+ to stay in the Nomura Bond Performance Index, which is used by most major Japanese pension funds. Tepco’s sole foothold is JCR, which rates it A.
“I can’t say the chances are zero, but we think it won’t happen,” Kunihide Takeuchi, a Tokyo-based fund manager at BlackRock, said of a possible ratings cut by JCR, because it takes into account outside support for the utility. Tepco’s “national economic significance” means it will receive government funding and bank loans, Takeuchi, who oversees 100 billion yen of bonds at BlackRock, said in an April 24 interview in his Tokyo office.
The extra yield investors demand to own Tepco’s 100 billion yen of notes due May 2013 rather than government debt averaged about 564 basis points this month, according to Japan Securities Dealers Association prices. The spread tightened from a record 964 basis points, or 9.64 percentage points, on Oct. 27, JSDA prices show.
Bond Index Rules
The yield premium was 10 basis points on March 10, a day before the quake that crippled Tepco’s Fukushima Dai-Ichi nuclear power plant.
Nomura Holdings Inc., Japan’s biggest brokerage, estimates that as much as 80 trillion yen of so-called passive investment funds link their performance to its index. Many of those funds wouldn’t be able to own Tepco’s debt if it was removed from the measure. The ratings rule applies to grades from Standard & Poor’s, Moody’s Investors Service, Japan’s Rating & Investment Information Inc. and JCR, according to the index criteria.
BlackRock is holding Tepco bonds with shorter maturities “to the extent that it wouldn’t cause trouble to our clients,” Takeuchi said. “Tepco bonds still have value” because the government will bail the company out, he said.
The power company requested 1 trillion yen from a government-backed fund to compensate people affected by the nuclear disaster, President Toshio Nishizawa said in a news briefing last month. The utility may face insolvency if its capital keeps falling, he said.