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Tepco bonds a safe bet now: Nomura

State-set cap on Fukushima cleanup costs ups utility allure

by Finbarr Flynn and Masumi Suga

Bloomberg

Nomura Holdings Inc. is urging investors buy Tokyo Electric Power Co. bonds after a report that the government plans to cap the utility’s cleanup costs at the wrecked Fukushima No. 1 nuclear power plant.

The yield premium on Tepco’s 1.155 percent notes due in 2020 fell to 343.4 basis points over government bonds Friday, 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, chief credit strategist in Tokyo at Nomura, the nation’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 the cost to Tepco of dealing with the disaster at the plant, and plans to as much as double to ¥10 trillion a credit line to help decommission the facility, the Nikkei newspaper reported Saturday. Banks are also considering ¥2 trillion in new loans tied to projects by Tepco, three sources said last week, adding impetus to the utility’s plans to recover from the world’s worst nuclear crisis since 1986.

Tepco is compiling a revised turnaround plan and details including a financial scheme cannot be disclosed at the moment, said Tepco spokeswoman Kaoru Suzuki. Officials at the Ministry of Economy, Trade and Industry, in charge of the power generator’s financing, could not be reached for comment.

The March 11, 2011, Great East Japan Earthquake and tsunami caused the poorly protected Fukushima plant to experience three reactor-core meltdowns that caused radioactive fallout that forced the evacuation of about 160,000 people. Abe said in August that the utility was not able to handle the disaster recovery at the plant after the company acknowledged radioactive groundwater was flowing into the ocean.

Tepco has estimated that the cleanup of the facility plus compensation will require at least ¥11 trillion. It will probably see its debt expand to ¥4.5 trillion by year’s end, according to Bloomberg calculations based on its earnings data.

A spending cap will 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.

The government-backed Nuclear Damage Liability Facilitation Fund took control of Tepco in July last year as the cost of compensating people affected by the nuclear disaster risked bankrupting the company. The fund injected ¥1 trillion into Tepco in exchange for 1.6 billion class-A shares at ¥200 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 cleanup 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 sources, 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 sources 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 on Dec. 12.

Tepco’s 1.155 percent notes, the last debt it sold to the public before the Fukushima disaster, traded at ¥84.3 of the ¥100 face value Monday, compared with a closing level of ¥57.8 in November 2011. The utility’s longest outstanding debt, due in May 2040, was at ¥68.1 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 11 basis points this year, or 0.11 percentage point, to 0.685 percent as of Monday.

Tepco’s bond risk has also decreased. The cost to insure its debt against nonpayment has fallen 80 basis points this year to 367 basis points as of Friday, and is down from a high of 1,762 in October 2011, according to credit-default swap prices from data provider CMA.

Banks and insurers have been converting part of ¥2 trillion in emergency loans in 2011 and a ¥1.07 trillion 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.