• Bloomberg


Bond prices show that creditors will have to share the bill for the nuclear crisis after the new minister responsible for power companies said banks should write off some loans to Tokyo Electric Power Co.

Five-year credit-default swaps on the utility, whose Fukushima No. 1 plant was wrecked by the March 11 earthquake and tsunami, surged a record 271.9 basis points last week to 887.9 basis points after Minister of Economy, Trade and Industry Yukio Edano repeated calls for investors to help pay for the costs of the disaster, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Contracts on Tepco are the most expensive relative to global peers since June 28, the data show.

Tepco faces compensation claims of as much as ¥11 trillion after the three reactor meltdowns at Fukushima, and helped tip the economy into recession.

Edano, 47, the chief Cabinet secretary in the previous administration, first called in May for banks to forgive some loans made before the quake. He was appointed head of METI on Sept. 12.

“We really have to consider the risk that Edano will push for a loan waiver,” said Hiroshi Nakamura, who helps oversee ¥3.5 trillion in assets as general manager of fixed-income investment at Mizuho Asset Management Co. “He shouldn’t say anything that might destabilize the market anymore.”

The cost of protecting Tepco’s debt from default surged more last week than in the immediate aftermath of the temblor, according to CMA. Contracts rose 239.5 basis points to 280 in the week to March 18, and peaked at 1,000 on June 7.

Credit-default swaps, which pay the buyer face value if a borrower fails to meet its obligations, fall as perceptions of creditworthiness improve and rise as they deteriorate. A basis point equals $1,000 annually on a contract protecting $10 million of bonds and loans.

Elsewhere in Japan’s credit markets, the yield on the nation’s benchmark 10-year bond rose half a basis point to 0.995 percent Wednesday, after touching 0.97 on Aug. 19, the lowest since November, according to Japan Bond Trading Co. Ten-year Treasury yields slid to a record 1.877 percent on Sept. 12.

Faced with the massive compensation claims against Tepco, legislation approved by the Diet on Aug. 3 created a government-backed entity to pay damages associated with the nuclear crisis with “necessary cooperation from shareholders and other interested parties.”

“The purpose of using tax money to aid Tepco doesn’t include the protection of creditors and shareholders,” Edano said Sept. 13. “They should bear costs they would have been liable for if there wasn’t support from the government.”

Edano, who as chief Cabinet secretary led daily briefings on the nuclear disaster, will participate in the government’s response to the crisis. He will oversee reforms at METI after his predecessor, Banri Kaieda, fired three top energy officials.

Tepco has ¥3.28 trillion of loans due in a year or more, according to a June 29 filing with the government. The utility owes Sumitomo Mitsui Banking Corp. ¥769.5 billion in loans, ¥581.8 billion to Mizuho Corporate Bank Ltd. and ¥349 billion to Bank of Tokyo-Mitsubishi UFJ Ltd.

“We have repeatedly said we wouldn’t accept forgiveness of loans to Tepco if we are asked to do so,” Katsunori Nagayasu, head of the Japanese Bankers Association and chief executive officer of Mitsubishi UFJ Financial Group Inc., said at a news conference Sept. 15. Banks have already given support to Tepco after the disaster, including ¥2 trillion of emergency loans, he said.

The nuclear reactors will be brought under control by the end of the year, a government official said Monday in an assessment backed by the United Nations’ atomic agency.

Standard & Poor’s cut Tepco’s credit rating by five levels to B+, the fourth-highest noninvestment grade, on May 30, citing a likelihood that banks may restructure some of the utility’s debts.

Tepco is considering job cuts and reshuffling some positions, spokesman Naoki Tsunoda said Wednesday. No concrete details have been decided yet, Tsunoda said, responding to media reports.

Tepco told a government committee Tuesday that it will eliminate as many as 5,000 jobs, NHK reported, citing an unidentified source.

There is a high chance the utility will still receive “extraordinary government support,” Hiroki Shibata, a Tokyo-based associate director for S&P covering power firms, told reporters Sept. 15. Edano’s talk of a loan waiver is “just his personal view,” Shibata said.

The economy is still reeling from the earthquake, with gross domestic product contracting in the second quarter by more than the government estimated, the Cabinet Office said Sept. 9.

S&P cut its forecast last week for Japan’s growth in 2011 to about zero, saying the yen may undermine a recovery from the temblor. The yen rose to a post-World War II high of 75.95 per dollar on Aug. 19, threatening to derail any export-led recovery.

One-year default-swaps on Tepco’s debt rose 626.2 last week to 1,756.4, the biggest weekly increase since the five days ending June 10, CMA prices show. The contracts are pricing in a 29 percent chance of default within a year, assuming a 35 percent recovery for bondholders, Bloomberg data show.

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