Nuclear Test for Abe as Quake Risk Doubles Spread: Japan Credit

LDP President Shinzo Abe
Japan's incoming prime minister and Liberal Democratic Party President Shinzo Abe. Photographer: Tomohiro Ohsumi/Bloomberg

Shinzo Abe’s support for nuclear energy is being tested during his party’s first week back in power after utilities’ borrowing costs surged amid probes into whether atomic facilities sit on active earthquake fault lines.

The extra yield investors demand to own Japan Atomic Power Co.’s 1.422 percent notes due December 2019 over government debt jumped 500 basis points to a record 900 basis points last week, according to JS Price. Regulators earlier this month said its Tsuruga plant may be sitting on an active fault. The spread on similar-maturity 1.405 percent notes sold by Kansai Electric Power Co., the second-biggest stakeholder in Japan Atomic, climbed 35 to 175 basis points, reaching the highest ever on Dec. 13, the data show.

Abe needs to weigh safety concerns with the impact of a closure on the power industry, which has suffered losses since a record earthquake in March 2011 led to the worst nuclear disaster in a quarter of a century and the closure of all but two of the nation’s 50 reactors. Tokyo Electric Power Co.’s shares surged 33 percent yesterday, leading a rebound in utilities as Abe’s landslide victory increased expectations they will reopen.

“If the reactor is decommissioned, Japan Atomic Power may find itself in default,” Tomoko Murakami, a Tokyo-based nuclear analyst at the Institute of Energy Economics, Japan, said in a telephone interview on Dec. 13. “The burden may fall on the shareholders, or the government might step in. The least publicly palatable option is to delay mothballing the reactor until sufficient funds are found.”

Active Fault

The yield spread on global utility bonds rose one basis point to 146 basis points last week, according to Bank of America Merrill Lynch data. The yield premium on Kansai Electric’s 1.405 percent debt and Japan Atomic Power’s 1.422 percent notes widened one basis point each yesterday, according to JS Price.

A team of scientists led by Nuclear Regulation Authority’s commissioner Kunihiko Shimazaki concluded on Dec. 10 that a fault under the Tsuruga No. 2 reactor had likely moved together with a nearby one that was active in the past. A fault is defined as active if it has moved in the past 120,000 to 130,000 years, according to the NRA.

Under Japan’s guidelines for nuclear plants, utilities are not allowed to build reactor buildings and other important facilities above an active quake fault. The NRA will discuss whether to allow Japan Atomic to restart the reactor after Shimazaki compiles a report “soon,” Chairman Shunichi Tanaka said Dec. 13. A decision on whether to decommission the reactor will be up to the operator, Tanaka said, as the nuclear watchdog doesn’t have legal authority to order it to do so.

Decommissioning Costs

Decommissioning a 1,100-megawatt reactor may cost as much as 56.5 billion yen ($673 million), the Federation of Electric Power Companies estimated in 2007. Japan Atomic would have 256 billion yen in losses if the company is forced to close the two reactors at the Tsuruga plant as well as the Tokai Dai-Ni station, exceeding its 163 billion yen in net assets, according to the trade and economy ministry’s estimate in June.

Japan Atomic Power’s Tokyo-based spokesman Mitsuru Marutani declined to comment on the bond moves. “We will continue to monitor the bond market conditions and include loans and commercial paper in our financing considerations,” Kansai Electric’s spokesman Takahiro Senoh said. He declined to comment on the impact of the election.


The cost to insure the debt of Kansai Electric for five years fell 10 basis points to 345 basis points yesterday, according to data provider CMA. Credit-default swaps on Tokyo Electric dropped 31 to 496, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The contracts fall when perceptions of creditworthiness improve, and rise when they worsen. Data on Japan’s Atomic’s swaps were unavailable.

Elsewhere in the domestic credit markets, East Nippon Expressway Co. hired Mitsubishi UFJ Morgan Stanley Securities Co., Nomura Holdings Inc. and Mizuho Financial Group Inc. to manage a 20 billion yen sale of five-year notes planned for no later than March 31, the first brokerage said in a statement yesterday.

Metropolitan Expressway Co. plans an offering of similar-maturity bonds managed by Daiwa Securities Group Inc., Mitsubishi UFJ Morgan Stanley, Mizuho and Nomura, according to a release from Mizuho.

Bond Returns

Hon Hai Precision Industry Co., a Taiwanese contract-manufacturer of electronics, signed an 8.5 billion yen commitment line from Japan Bank of International Cooperation and ING Groep NV, according to a statement on the website of insurer Nippon Export and Investment Insurance yesterday. The company will use the funds to purchase machinery from Japanese manufacturers, it said.

Japan’s corporate notes have handed investors a 1.4 percent return this year, compared with the 2 percent gain for the nation’s sovereign debt, according to Bank of America Merrill Lynch data. Company bonds worldwide have returned 10.5 percent, the data show.

The yen weakened 0.1 percent to 83.98 per dollar at 3:54 p.m. in Tokyo today. It slid to 84.48 yesterday, the weakest since April 2011, after Abe’s Liberal Democratic Party won elections on Dec. 16. He has called for more Bank of Japan stimulus to achieve 2 percent inflation.

Nuclear Decision

The LDP said in its election pledges that it will make a decision on whether to restart all of Japan’s nuclear reactors within three years. It also vowed to decide the country’s best energy mix within 10 years. The Democratic Party of Japan, which was defeated over the weekend, and smaller opposition parties are calling for the phasing out of nuclear power.

“The LDP has been seen as very interested in restarting the country’s reactors, which is a positive for the nuclear industry and has already been reflected in the pricing,” Taketoshi Tsuchiya, Tokyo-based director of credit trading at Barclays Plc. “There isn’t much action from overseas investors, since they are already in holiday-mode. The credit markets are reacting very calmly to the news.”

New Plants

Abe indicated he may allow utilities to build a new nuclear power plant if it meets safety standards to be set by the NRA, the Tokyo Shimbun reported Dec. 1, citing an interview with him. Prime Minister Yoshihiko Noda in September approved a policy calling for banning the construction of new atomic plants.

LDP Chairman Hiroyuki Hosoda said in an interview with Bloomberg last month that Japan must restart its plants quickly after confirming they’re safe, citing increasing energy prices.

Shares of Kansai Electric closed 4.5 percent lower in Tokyo trading today, after climbing 18 percent yesterday, the biggest increase since at least September 1974. Its Ohi facility north of Osaka is Japan’s only operational nuclear power plant. Tokyo Electric’s shares surged 20 percent today. Japan Atomic Power is an unlisted company.

Japan Atomic Power plans to carry out additional investigations to support its view that the fault is not active, saying the geologists “didn’t present enough explanation,” according to an open letter from the company to the NRA.

“There is a good chance that the reactor won’t get the permission to restart, which makes decommissioning a real possibility,” Toshihiro Uomoto, Tokyo-based chief credit analyst at Nomura Securities Co., wrote in a report on Dec. 13. “Given a little bit of time, the arrival of the new government may create some breathing room.”

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