Utilities’ bond risk climbing amid nuclear shutdowns

by Yusuke Miyazawa and Tsuyoshi Inajima

Bloomberg

The bond risk of nuclear power companies had the largest weekly increase in seven months led by Kansai Electric Power Co., the utility likely to face the biggest electricity shortage this summer, after the country shut its last reactor.

The cost to insure the debt sold by Kansai Electric climbed 49 basis points last week to 286 basis points Thursday, on track for the biggest seven-day jump since Oct. 14, CMA prices show. That’s more than double the 19 basis point gain for Markit iTraxx Japan index of default swaps and tenfold the advance for North American companies in the period, according to the data.

Japan, without atomic power for the first time since May 1970, is relying on imported oil and liquefied natural gas to avoid electricity shortages, leaving utilities vulnerable to rising prices and supply interruptions. Moody’s Investors Service last week cited the impact of shutdowns on profitability when it cut ratings by two levels on Kansai and five other nuclear operators.

“Kansai Electric bonds are being shunned,” Toshihiro Uomoto, chief credit strategist at Nomura Securities Co., wrote in a May 7 note to clients. “Kansai Electric is the company that needs atomic plants the most out of all regional power companies, while its hurdle for the restart seems to be the highest.”

The credit-default swaps of Kyushu Electric Power Co. jumped 39 basis points last week to 271 on Thursday, while contracts of Chubu Electric Power Co. rose 37 to 218, according to CME Group Inc.’s CMA. No pricing data was available on the swaps of nuclear reactor operators Hokkaido Electric Power Co., Chugoku Electric Power Co. and Hokuriku Electric Power Co.

The ratings of senior secured bonds issued by the six utilities were lowered to A3 from A1, while Electric Power Development Co.’s credit rank was reduced one grade to A1, Moody’s said in a statement on May 10. A3 is the credit ratings company’s fourth-lowest investment grade. Tokyo Electric Power Co. was spared a downgrade after the owner of the stricken Fukushima plant was taken over by the government.

“Most of Japan’s electric power utilities are experiencing deterioration in their profitability, cash flows and balance sheet strength,” Moody’s said in the statement. Utilities “will experience an extended period of greater regulatory uncertainty, lower profitability and cash flows, higher capital spending and capital structures generally weaker than evident before the accident.”

Kansai Electric is “closely monitoring the market,” Akihiro Aoike, an Osaka-based spokesman for the utility, said Friday by phone. He declined to comment further.

Utilities operating nuclear reactors are paying yield premiums that are six times the levels before the earthquake and tsunami on March 11 last year that wrecked Tokyo Electric Power’s Fukushima No. 1 plant, sparking the worst nuclear crisis since Chernobyl in 1986.

Tohoku Electric Power Co. sold ¥60 billion ($751 million) of notes on March 2, split between ¥50 billion of five-year notes and ¥10 billion bonds due 2022, both priced to yield 55 basis points more than similar-maturity government debt. That compares with a spread of 9 basis points, or 0.09 percentage point, paid in January 2011.

Sales of Japanese corporate bonds dropped 16 percent last fiscal year to ¥8.3 trillion as debt offered by electrical power companies fell to ¥70 billion, less than 1 percent of the total, from 11 percent a year earlier, data compiled by Bloomberg show.

The spread on utility bonds over Japan’s sovereign debt has climbed one basis point this year to 44 basis points on May 10, according to an index compiled by Bank of America Merrill Lynch. That compares with a 4-point decline in the extra yield for Japanese company notes to 46 during the same period, and a 59-point drop in the gap for global corporate debt to 208, separate indexes show.

Japan took control of Tokyo Electric and agreed to provide ¥1 trillion as part of the nation’s largest bailout since the rescue of the banking industry in the 1990s. The government will get more than 50 percent of the voting rights in the utility under a 10-year plan approved last week by trade and industry minister Yukio Edano.

Under the plan, the utility aims for an unconsolidated profit of ¥106.7 billion in the year ending March 2014, based on an electricity rate increase and the restart of the Kashiwazaki Kariwa nuclear station. Nationalization of Tepco paves the way for the government to restructure the power industry monopolized by regional utilities and possibly break up generation and transmission networks to allow competition.