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Cost to insure Tepco’s debt soars on back of bad news

by Monami Yui and Emi Urabe

Bloomberg

The bond risk for Tokyo Electric Power Co., from whose stricken Fukushima nuclear plant highly radioactive water is flowing into the sea, surged the most since June on concern delays in getting reactors started at another atomic plant will spoil its loans.

The cost to insure the debt of Tepco surged 20 basis points to 272 basis points last week, the steepest five-day climb in two months, according to data provider CMA. Japan’s benchmark for credit risk rose 2 to 95 last week, while the credit-default swaps of U.S. investment-grade utilities increased 1 to 78.

Tepco is at least four months behind schedule in restarting its seven-reactor Kashiwazaki-Kariwa nuclear plant, the world’s biggest, in large part because of political opposition. Its case was further weakened after revelations that about 300 tons of radioactive water had leaked from a storage tank at Fukushima. The utility told lenders this month it would need to raise power prices as much as 10 percent next year to avoid a third straight year of pretax losses, a document obtained by Bloomberg News showed. Tepco pledged to earn a profit to get a ¥580 billion ($5.95 billion) loan this year.

“There is no reason why we can be bullish on Tepco’s credit amid the negative news flow,” said Mana Nakazora, chief credit analyst in Tokyo at BNP Paribas SA, which is one of the 23 primary dealers obliged to bid at government debt auctions. “The losses will widen if it keeps delaying the restart while struggling to raise rates. Considering that banks have their own shareholders, I can’t assure you that they will continue to lend.”

The reactors at Kashiwazaki-Kariwa in Niigata Prefecture have a total installed capacity of 8.2 gigawatts, almost 18 percent of the country’s entire functioning nuclear fleet and enough power to supply about 2.7 million households.

Tepco, Japan’s biggest utility, faces an October deadline to refinance an ¥80 billion syndicated loan arranged by Sumitomo Mitsui Banking Corp.

The company is also seeking to roll over ¥200 billion in borrowings and get a new loan worth ¥300 billion in December from 10 lenders, which include Sumitomo Mitsui, Development Bank of Japan, Bank of Tokyo-Mitsubishi UFJ Ltd., Mizuho Bank Ltd., trust banks and insurance companies.

The funds are part of Tepco’s ¥1.07 trillion finance plan agreed to in 2012 under a ¥1 trillion bailout after the temblor and tsunami in March 2011 led to three meltdowns at its Fukushima No. 1 plant.

“I’m expecting that Tepco will propose to us an updated business plan around the beginning of autumn,” Takeshi Kunibe, chairman of the Japanese Bankers Association, told reporters on July 18. Kunibe is also Sumitomo Mitsui Banking’s president.

Tepco said Tuesday that contaminated water probably leaked into the soil from the tank due to an open valve in a containment barrier surrounding the storage vessel. The company has been struggling to stop the flow of radioactive water into the soil and sea for more than two years.

The news sent the bond risk of the utility 20 basis points higher Tuesday, the biggest jump since April 10. The default swaps surged to as high as 1,762 in October 2011 amid the Fukushima disaster. Tepco’s shares plunged 9.3 percent in Tokyo trading Wednesday.

“It’s a very serious issue for Fukushima and it could possibly impact the restart of Kashiwazaki-Kariwa as well,” said Tom O’Sullivan, an analyst with Tokyo-based energy consultant Mathyos. “This inability to come to terms with the seriousness of it and to anticipate the problems as well is where I would be hitting them hard.”

Niigata Gov. Hirohiko Izumida has opposed the restart of reactors at Kashiwazaki-Kariwa, which is in his jurisdiction. Local municipal leaders are split on the issue, with eight, including the hosts Kashiwazaki and Kariwa, supporting restarts and nine saying they won’t approve them, according to a survey by the Sankei newspaper with 28 of the 30 local governments in Niigata.

Mayumi Yoshida, a spokeswoman for Tepco, declined comment on market prices, and said the utility will make its best effort to meet its business plan outlined in May last year.

The strategy outlined by Tepco when it secured the loan package said restarting reactors at Kashiwazaki-Kariwa from last April would have resulted in net income of about ¥107 billion and pretax profit of ¥92 billion in the year through next March.

The firm also aims to return to the corporate bond market after the middle of the decade, the plan said.

Tepco posted a pretax loss of ¥29.4 billion in the three months through June, according to its earnings statement released July 31. Boosted by a one-time handout from the government, net income was ¥437.9 billion.

If Kashiwazaki-Kariwa remains halted, Tepco would need to increase power rates from 8.5 percent to 10 percent as early as January to achieve a pretax profit for this fiscal year, the document obtained by Bloomberg News showed. Tepco already raised household rates by about 8.5 percent last September.

The possible rate increase suggests “the company isn’t handling things smoothly,” said Toshihiro Uomoto, chief credit analyst in Tokyo at Nomura Securities Co. “We need to see if there will be positive developments.”