Japan may nationalize Asia’s largest utility, Tokyo Electric Power Co (TEPCO), as it struggles with the financial costs of the country’s worst nuclear disaster, a move that would please bondholders but hurt shareholders who would likely lose out.
Imposing state management is one option that Japan is mulling, National Strategy Minister Koichiro Gemba said yesterday, as the costs of compensating businesses and households affected by leaking radiation and the expense of repairing crippled nuclear reactors looked set to soar.
TEPCO’s ability to pay has been hobbled by a fall in generation capacity that is causing rolling blackouts that are expected to last for weeks if not months.
By gaining a de facto government guarantee on its ¥7.5 trillion (US$91.8 billion) in debt, bondholders would feel more confident that TEPCO can repay its loans, analysts said.
“If the government nationalizes TEPCO, I don’t see any significant immediate impact on lenders and bondholders. Rather, I think the event could be positive for TEPCO’s credit status,” said Tetsuya Yamamoto, a senior analyst at Moody’s Investors in Japan.
TEPCO’s future has been tenuous since the March 11 earthquake and tsunami struck its Fukushima Dai-ichi nuclear complex, causing it to leak radiation. Its shares have fallen 70 percent and the cost of insuring its debt against default has risen 10-fold.
“Naturally it is possible that there will be various debates about the state of Tokyo Electric,” Gemba was quoted by Kyodo news agency as saying when asked about the possibility of nationalization.
The Yomiuri Shimbun reported earlier that some members of the government had proposed a plan for the state to take a majority stake in TEPCO and help it pay for damages stemming from the nuclear accident.
SPINOFF?
One government source said one plan being floated was to spin off TEPCO’s nuclear business into a separate company and nationalize that.
“The possibility is small that TEPCO continues on in its current state,” said the source, who was not authorized to speak publicly on the matter.
The company has been roundly criticized for its lack of preparedness and handling of the disaster, with experts questioning its response and Japanese Prime Minister Naoto Kan reportedly demanding “What the hell is going on?” as the radiation crisis unfolded.
Even before compensation claims are filed, the crippled former state-owned utility faces higher costs.
Nomura Holdings analyst Shigeki Matsumoto said this month that TEPCO would have pay more than US$1 billion every month on alternative fuels to make up for lost capacity. With reactors likely to be offline for a long time, that expense will mount.
TEPCO took almost two years to restart reactors at its Kashiwaki-Kariwa plant after an earthquake there halted generation in 2007, although the damage was far less severe that at Fukushima, Matsumoto said.
With the Fukushima plant still spewing radiation, the eventual bill could easily outstrip TEPCO’s financial resources.
The crisis appeared to escalate in the past few days with plutonium found in soil yesterday rattling already shaky financial markets.
DENIALS
Ballooning costs could quickly eat through emergency financing from Japan’s big banks, which are in talks to provide about US$25 billion in loans. Still, any political decision to bring TEPCO under state control may take some time. Japanese Chief Cabinet Secretary Yukio Edano said earlier yesterday that the government was not currently considering nationalizing the utility.
“At this point, it is my understanding that government institutions are not considering such a move. The government will be directing TEPCO to do this everything possible, to resolve this situation and those who are affected,” he said.
TEPCO spokesman Hajime Motojuku said he was unaware of any plan for nationalization.
“Our first and biggest priority at this moment is to prevent the nuclear power plant accident from worsening further,” he said.
The proposal, however is already eroding shareholder value.
“Although details cannot be seen such as how exactly the government is going to nationalize the company, as long as there are concerns that TEPCO may be nationalized, investors don’t want to hold the stock. Passive funds are selling too,” said Hajime Nakajima, a trader at Cosmo Securities in Tokyo.
Tokyo Electric shares were untraded due to a glut of sell orders at ¥566, down 19 percent from Monday’s close. The company has lost about US$30 billion in market value since the March 11 disaster.
The spread on TEPCO’s five-year credit default swaps widened to a record high of 475 basis points on Monday on Markit, against just 40 points before the crisis.
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