Tepco Default Swaps Surge Above BP Levels After Gulf Spill

The cost of protecting Tokyo Electric Power Co.’s debt from default surged to a record amid reports the utility will post Japan’s largest corporate loss when it announces earnings today following the Fukushima nuclear crisis.

Credit-default swaps on Tokyo Electric’s debt jumped 221 basis points to 726, topping BP Plc’s record set last year amid the oil spill disaster in the Gulf of Mexico.

The company, known as Tepco, may report a loss of 1.5 trillion yen ($18 billion) and replace President Masataka Shimizu, the Yomiuri newspaper reported. That would exceed the current largest corporate loss of 812 billion yen reported by Nippon Telegraph & Telephone Corp. in the year ended March 2002, according to data compiled by Bloomberg. Mizuho Financial Group Inc.’s 2.38 trillion yen loss the following year is the largest in Japan.

“Without state support, it will be difficult for Tepco to remain as a publicly-traded company,” said Junichi Misawa, head of equity investment at Tokyo-based STB Asset Management Co., which oversees about $17 billion. “This loss can’t be a one-off event for this year as it will have to continue paying compensation.”

For the year ended March 31, 2010, Tepco had total capital of 2.5 trillion yen, indicating a loss of more than 1 trillion yen in today’s earnings report would wipe out almost half of its capital, according to data compiled by Bloomberg.

The Fukushima Dai-Ichi nuclear plant north of Tokyo has been spewing radiation since the March 11 quake and tsunami damaged power and cooling systems, causing at least one of six reactors to melt down. Management of Tepco, as the company’s known, has been criticized by the government and academics for its handling of the crisis and the claims against the company may be as high as 11 trillion yen.

Shares Fall

Shares in the company fell as much as 8.9 percent today in Tokyo to 326 yen and were at 357 yen as of 2:15 p.m. The stock has fallen almost 84 percent since the day before the quake, wiping 2.9 trillion yen off the company’s market value.

Credit-default swaps on Tepco bonds rose to 726 basis points, topping BP’s record 577.5 basis points set on June 29, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Katsutoshi Chikudate, 69, will become Tokyo Electric’s new president, replacing Shimizu, 66, who will resign to take responsibility for the world’s worst nuclear crisis since Chernobyl in 1986, the Yomiuri reported. Chairman Tsunehisa Katsumata, 71, will remain, the paper said.

Resisting Calls

Tepco reported a 133.8 billion yen profit in the previous year ended March 31, 2010.

Japanese banks are resisting government calls for lenders to support Tokyo Electric by forgiving loans or easing interest charges. Masayuki Oku, chairman of the Japanese Bankers Association, said on May 19 that banks aren’t considering writing off or cutting interest payments on existing loans.

“The government and Tepco should solve the issue by sharing the burden,” Oku told reporters in Tokyo. Atsushi Saito, head of the Tokyo Stock Exchange, said May 17 that Edano’s remarks “invite worldwide confusion” as Tepco “is a publicly traded company, not a government one.”

Remarks Clarified

Chief Cabinet Secretary Yukio Edano today clarified remarks he made last week suggesting lenders may need to waive loans made to Tepco before the quake, comments that caused bank stocks to fall.

“I was pointing to the need to gain public understanding for the plan rather than focusing on the responsibility of lenders,” he said, referring to the utility’s arrangements for compensating those affected by the nuclear accident.

On May 15, more than two months after the disaster at the Fukushima Dai-Ichi plant, Tepco said conditions were worse than believed in reactor No. 1 after it found all uranium fuel rods had melted.

Beside radiation leaks into the atmosphere forcing about 50,000 families near the plant to evacuate, more than 10 million liters (2.6 million gallons) of radiation-contaminated water have leaked or been released into the sea.

Millions of liters of radiated water have also filled basements and trenches at the station from leaking reactor vessels and piping.

Japan’s government in April raised the severity rating of the Fukushima crisis to the highest on an international scale, the same level as the Chernobyl disaster. The station, which has experienced hundreds of aftershocks since March 11, may release more radiation than Chernobyl before the crisis is contained, Tepco officials have said.

(Updates with balance sheet data in fifth paragraph.)
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