Once a Market Pariah, Tepco Bonds Have Turned to Gold

  • Utility issued notes with lower coupon than March offering
  • March bond spread drop has outpaced overall market’s decline

Tepco employees work at the company's central grid management center in Tokyo,

Photographer: Tomohiro Ohsumi/Bloomberg

Six years after the Fukushima nuclear disaster, Tokyo Electric Power Co. Holdings Inc. has gone from being a company that can’t sell debt to one whose bonds are lapped up by investors seeking a bit of extra yield.

Tepco Power Grid Inc., a transmission and distribution unit, this week issued notes for the second time since the group returned to the market this year, and its terms improved: the firm sold five-year debt at 0.52 percent, six basis points lower than the 2022 bonds it issued in March. It also offered seven-year notes this time, whereas three months ago it issued three-year securities.

Tepco bond bulls are betting that Japan’s biggest utility will be able to manage 15.9 trillion yen ($143 billion) in cleanup costs for the Fukushima plant with help from the government, making the extra yield on its notes compared with other Japanese corporate bonds attractive. That’s helped pull down the spread on Tepco’s March bonds by 12 basis points since its sale, outpacing the four-basis point drop in the average yield premium on the nation’s company debt during the same period, according to Bank of America Merrill Lynch data.

“Tepco’s bonds are worth buying for the simple reason that the government is backing it up,” said Mana Nakazora, the chief credit analyst at BNP Paribas SA in Tokyo. “I get the sense that regional investors including banks are no longer that hesitant to buy the bonds.”

Tepco Power Grid’s sale of bonds in March was the first in six years for the utility, after a record earthquake and tsunami caused a triple meltdown at the Fukushima Dai-Ichi nuclear power facility in 2011. The disaster put the company on the verge of default, leading the government to inject 1 trillion yen into the utility in 2012 in the nation’s largest bailout since the 1990s.

The yield on Tokyo Electric’s bonds due in February 2020 jumped to about 10 percent in November 2011. The rate fell to 0.34 percent this week.

See also: new president says Tepco wants to expand abroad

Tepco’s success in raising funds in March spurred further demand for the notes, causing the tightening in its debt spreads, said Katsuyuki Tokushima, chief investment analyst at NLI Research Institute. He said that investors are divided between those who are willing to buy the notes because of their view that the debt has an implicit government guarantee, and those who aren’t willing because they think Japan’s electric utility sector is still risky.

“Basically I consider them a buy, but not 100 percent so with complete confidence,” Tokushima said. “This time they issued five-year and seven-year bonds, so I don’t think we need to be that worried about repayment.”

Nakazora at BNP Paribas said she has recommended Tepco debt the most among Japanese electric utility bonds because of its extra yield. Kansai Electric Power Co.’s notes due September 2020 have a spread of 26 basis points, compared with a yield premium of 48 basis points for Tepco debt due that same month, Bloomberg-compiled data show.

The total cost related to the Fukushima disaster is estimated at 21.5 trillion yen, and Tokyo Electric will be responsible for 15.9 trillion yen of that, Japan’s Ministry of Economy, Trade and Industry said in December. That will include victim compensation payments coming to 7.9 trillion yen and decontamination cost of 4 trillion yen. As part of official estimates in December, the government was set to increase its credit line to Tepco to 13.5 trillion yen.

“Tepco is of course a company that caused an accident and is burdened with big future payments, but in the end, it’s a utility company,” said Toshiyasu Ohashi, the chief credit analyst at Daiwa Securities Group Inc. in Tokyo. “Investors are comfortable with its bonds.”

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