Tepco CDSs leap on loan writeoff remark


Credit-default swaps on Tokyo Electric Power Co. are trading at a three-week high after the government’s chief spokesman said public pressure may force lenders to write off loans to the troubled utility.

Contracts protecting Tepco debt from default jumped 145.4 basis points to 357.8 basis points Friday, the biggest increase since March 15 and the highest since April 19, CMA prices show. Swaps on U.S. utilities average 145.7 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Chief Cabinet Secretary Yukio Edano told reporters Friday that “people won’t support” using taxpayer funds for Tepco unless its banks forgo some loans made before the March 11 earthquake and tsunami crippled its Fukushima No. 1 nuclear power plant. The government has already agreed to provide financial aid to protect the utility from bankruptcy.

“We are very sorry to hear” Edano’s comments, Hisayoshi Nogawa, a structured credit strategist at BNP Paribas Securities Japan Ltd., said in a phone interview from Tokyo. The plan “was designed to continue Tepco’s business, compensation and the stability of financial institutions,” Nogawa said.

Japan is struggling to contain the worst nuclear disaster since Chernobyl and is attempting to bail out the debt-laden utility and compensate radiation victims. The government will create an agency to handle claims made against Tepco and will issue bonds to fund them, according to a statement released Friday after a meeting of Prime Minister Naoto Kan’s cabinet.

Standard & Poor’s cut Tepco’s credit rating Friday by one level to BBB from BBB+. That’s the third reduction since March 14, when it was graded AA-. Tepco has ¥6.99 trillion in debt, making it the nation’s second-largest corporate borrower among members of the Nikkei 225 Stock Average, behind Mitsubishi UFJ Financial Group Inc., Bloomberg data show.

Even after the government plan was announced, “the upper limit of compensation remains unclear at this stage, and we expect Tepco’s profitability to remain under significant pressure for a very long period,” the risk assessor said in a statement Friday.

Tepco earlier accepted the conditions set by the government, which include unlimited liability on payments for damages from the accident at the Fukushima plant. Aid to Tepco will run to trillions of yen, Edano said.

The utility “must ask for cooperation from all its stakeholders and detail the content of the cooperation from the financial institutions to the government,” the statement said.

“This is saying banks voluntarily waive debt. They don’t normally do it,” Hiroshi Nakamura, general manager of fixed-income at Mizuho Asset Management Co. in Tokyo, said in a telephone interview Friday. “The current administration is an incarnation of populism, so they can only say things that earn popularity.”

More credit downgrades


Ratings agency Moody’s on Monday again downgraded Tepco and warned the rating would remain on review for further possible action.

The agency said it downgraded Tepco’s senior secured debt by one notch to Baa2. It also downgraded the utility’s long-term issuer rating two notches to Baa3 from Baa1. It was Tepco’s third downgrade since the March 11 disasters.

Moody’s said the downgrade came amid “continuing uncertainty as to how Tepco will be actually supported by the government to meet its compensation and other expenses following the March 11 earthquake.”