Approaching reactor restarts encourage utilities to sell bonds

Bloomberg

The Nuclear Regulation Authority is moving toward the first reactor restart under its new safety requirements since the Fukushima disaster started, giving impetus to bond sales by utilities as borrowing costs plunge.

The regulator may submit a safety report on two reactors at Kyushu Electric Power Co.’s Sendai plant on July 16, paving the way for them to come online before year’s end, the daily Yomiuri Shimbun reported this week. The utility is set to sell ¥20 billion ($197 million) in 10-year bonds Friday at 39 basis points over government debt, its lowest spread for such maturities since 2010, a source said.

Kansai Electric Power Co. and Shikoku Electric Power Co. also plan to offer notes this week as investors are drawn by the industry’s higher-than-average yield premiums. Unprecedented Bank of Japan stimulus has pushed down Japanese corporate spreads to a seven-year low of 22 basis points. That for power companies’ debt is 29 basis points, compared with 105 for utilities worldwide, Bank of America Merrill Lynch data show.

“The fact that the government is in favor of restarting reactors is positive because it shows a firm commitment toward the electric power companies,” said Yasuhiro Matsumoto, the senior manager for the financial services industry at ABeam Consulting Ltd. “Once one restart is approved, others will come one after another, and the pace may quicken. You can’t approve one but turn down others.”

The Sankei, another daily paper, said earlier that the nuclear regulator would give the green light to restarting the Kyushu reactors as early as Wednesday. The draft inspection report is completed and commissioners are examining the approximately 400-page document, NRA Chairman Shunichi Tanaka told reporters the same day. He declined to say when it will be made public.

All 48 of Japan’s functioning commercial reactors are idled for safety checks after a tsunami wrecked Tokyo Electric Power Co.’s Fukushima No. 1 plant on March 11, 2011, and caused the worst nuclear crisis since Chernobyl in 1986.

Utilities’ expenses have mounted as they’ve had to purchase fossil fuel to make up for nuclear energy. The nation’s 11 power companies had combined net losses of ¥482.7 billion in the three months that ended on March 31, compared with a profit of ¥4.7 billion in the same period in 2010 before the Fukushima disaster started, according to data compiled by Bloomberg.

Power companies and regulatory officials should pay greater attention to sticking to timetables for starting reactors, Mana Nakazora, the chief credit strategist at BNP Paribas SA, wrote in note on Tuesday.

“Interested parties should be keenly aware that simply extending such timelines risks putting a brake on the industry’s improving credit risk,” she wrote in the report. While spreads on the industry’s bonds will probably continue to tighten, approval for the Kyushu restart alone won’t likely accelerate that move, she wrote.

Japanese utility bond spreads have come down from as high as 202 basis points, or 2.02 percentage points, in June 2011, according to Bank of America Merrill Lynch index data. The extra yield on 10-year bonds sold last year by Fukuoka, Japan-based Kyushu Electric has fallen to 41 basis points compared with 59 when they were offered in November, Bloomberg-compiled data show.

The benchmark 10-year government debt yield has tumbled 25 basis points since the end of 2012, when Prime Minister Shinzo Abe took power. The yen weakened 15 percent against the dollar in the period, raising the fuel import bill for utilities. It traded at 101.65 as of 7:48 p.m. in Tokyo Wednesday.

The nation’s power companies have sold ¥410 billion in bonds this year as of Wednesday. They issued ¥925 billion in 2013, accounting for 11 percent of the Japanese market and topping the ¥906 billion in 2010 for electricity utilities excluding Tepco, according to Bloomberg-compiled data.

Kansai Electric, based in Osaka, was marketing ¥30 billion in five-year bonds to investors at 38 to 40 basis points over government bonds for sale on July 11, according to a source. Shikoku Electric, based in Takamatsu, Kagawa Prefecture, plans to sell ¥10 billion in bonds to individual investors the same day at a coupon from 0.1 percent to 0.4 percent.

Power companies’ bonds carry a higher level of political risk than before the 2011 earthquake and aren’t cheap on that basis, according to Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management Co. in Tokyo.

A district court ruled in May against Kansai Electric’s Ohi plant going back online. Nuclear restarts anywhere in Japan are opposed by 59 percent of those who responded to a poll in March by the Asahi newspaper.

“The risks surrounding power companies haven’t changed while spreads have tightened ahead of things, so they have lost a lot of their attractiveness as an investment,” Nakatani said. “Even taking in account government support, you have to look at power company utilities as incorporating higher political risk, and have to offer that corresponding spread.”