Nomura Says Buy Tepco as Fukushima’s Cost Cap Seen

Fukushima Dai-ichi nuclear power plant
Members of the media and Tokyo Electric Power Co. (Tepco) employees wearing protective suits and masks stand on a fuel handling machine on the spent fuel pool inside the building housing the No. 4 reactor at the Fukushima Dai-ichi nuclear power plant in Okuma, Fukushima Prefecture, Japan, on Nov. 7, 2013. Photographer: Kimimasa Mayama/Pool via Bloomberg

Nomura Holdings Inc. is urging investors buy Tokyo Electric Power Co. bonds after a report that Japan’s government plans to cap the utility’s clean-up costs from the wrecked Fukushima nuclear plant.

The yield premium on Tepco’s 1.155 percent notes due in 2020 fell to 343.4 basis points over government bonds on Dec. 13, its lowest in a month, and down from a record of 699 in September 2011. That compares with an average spread of 461 basis points for debt worldwide with the same B level credit rating, the least since February 2011, according to Bank of America Merrill Lynch index data.

“Keep buying Tepco bonds and the faster the better,” said Toshihiro Uomoto, the chief credit strategist in Tokyo at Nomura, Japan’s biggest brokerage. “It is a big, big change” if a cap is placed, he said.

Prime Minister Shinzo Abe’s government will limit to 8 trillion yen ($77.7 billion) the cost to Tepco of dealing with the disaster at the Fukushima Dai-Ichi atomic plant, and plans to as much as double to 10 trillion yen a credit line to help decommission the facility, the Nikkei newspaper reported on Dec. 14. Banks are also considering 2 trillion yen in new loans tied to projects by Tepco, three people familiar with the matter said last week, adding impetus to the utility’s plans to recover from the worst nuclear crisis since 1986.

Tepco is compiling a revised turnaround plan and details including finances can’t be disclosed at the moment, said Kaoru Suzuki, a spokeswoman for Tepco. Officials at Japan’s Ministry of Economy, Trade and Industry, in charge of the power generator’s financing, couldn’t be reached for comment.

Radiation Leak

A record earthquake and tsunami on March 11, 2011, ruined Tepco’s Fukushima Dai-Ichi, causing radiation leaks that forced the evacuation of about 160,000 people. Abe said in August that the utility isn’t able to handle the disaster recovery at the plant after the company acknowledged contaminated groundwater was seeping into the ocean.

The power company has estimated that the clean-up of the facility plus compensation will require at least 11 trillion yen. Tepco will probably see its debt expand to 4.5 trillion yen by the year-end, according to Bloomberg calculations based on its earnings data.

A spending cap would allow Tepco to predict future cash flows and show lenders and bondholders that it can “come back to a normal course of business,” according to Nomura’s Uomoto.

Government Control

The government-backed Nuclear Damage Liability Facilitation Fund took control of Tepco in July of last year as the cost of compensating people affected by the nuclear disaster risked bankrupting the company. The fund injected 1 trillion yen into Tepco in exchange for 1.6 billion in class-A shares at 200 yen per share and higher priced class-B shares.

Additional support for Tepco will be decided at a meeting this month of a special task force headed by Abe to deal with the disaster, the Nikkei reported. The government plans to fund the clean-up through tax receipts and gains from selling shares in Tepco, the newspaper said.

Banks are discussing with Tepco project finance loans linked to individual ventures such as rebuilding aging thermal power plants, said the three people, who asked not to be identified because the talks are private. Tying loans to particular projects limits financiers’ exposure to Tepco’s default risk, the people said.

“The spread on Tepco’s debt will likely tighten” after the company releases its revised operational plan this month and banks make a decision on lending, Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA, wrote in a report published Dec. 12.

Below Par

Tepco’s 1.155 percent notes, the last debt it sold to the public before the Fukushima disaster, traded at 84.3 yen of the 100 yen face value yesterday, compared with a closing level of 57.8 yen in November 2011. The utility’s longest outstanding debt, due in May 2040, was at 68.1 yen to par, according to data compiled by Bloomberg.

Abe’s economic stimulus steps to end 15 years of deflation have reduced Japan’s 10-year benchmark yield by 13 basis points this year, or 0.13 percentage point, to 0.665 percent today. The yen has dropped almost 16 percent in 2013 to 102.97 per dollar as of 4:24 p.m. in Tokyo today, after falling to 103.92 last week, the weakest since October 2008.

Tepco’s bond risk has also decreased. The cost to insure its debt against non-payment has fallen 118 basis points this year to 328 basis points yesterday, and is down from a high of 1,762 in October 2011, according to credit-default swap prices from data provider CMA.

Bond Conversion

Banks and insurance companies have been converting part of 2 trillion yen in emergency loans in 2011 and a 1.07 trillion yen finance plan agreed under a government bailout for the utility into private placement bonds, whose repayment takes priority over uncollateralized loans in the event of bankruptcy.

“It would be going too far to say that Tepco’s going concern risk has completely disappeared but it is significantly retreating,” said Toshiyasu Ohashi, the chief credit analyst at Daiwa Securities Group Inc. in Tokyo.

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