Abe nuclear revival pushes sales to pre-quake high: Japan Credit

By Amina Mobley and Yusuke Miyazawa  /  Bloomberg

Thu, Mar 07, 2013 - Page 9

Japanese Prime Minister Shinzo Abe’s plan to review Japan’s zero-nuclear policy helped push bond sales by utilities to the most since the March 2011 earthquake left all but two of the nation’s 50 reactors idle.

Kyushu Electric Power Co led ¥150 billion (US$1.6 billion) in offerings by atomic energy producers last month, according to data compiled by Bloomberg. That is the highest level since May 2010.

Japanese utilities pay 0.74 percent to sell debt, compared with an average 0.55 percent for the country’s companies and 2.61 percent for companies worldwide, Bank of America Merrill Lynch indices show.

Abe told the National Diet (Japan’s bicameral legislature) last week that he will resume Japan’s reactors, which once supplied about a third of the country’s electricity, even as the approaching second anniversary of the quake stirs memories of the worst nuclear accident in a quarter of a century.

Utility bonds are attracting investors on improved prospects and higher returns amid the lowest corporate yields since June 2005, the Bank of America Merrill Lynch bond index shows.

“Frankly speaking, there is little else to buy because yields are so low,” said Tadashi Matsukawa, who helps oversee US$1.5 billion as head of fixed income investment at PineBridge Investments Co in Tokyo.

“The market is convinced of the government’s unspoken support for the industry,” he added.

Kyushu Electric’s ¥60 billion of three-year notes offered on Feb. 22 had a coupon of 0.65 percent, or 60 basis points more than similar maturity government debt, data compiled by Bloomberg show.

The sale is the largest ever for the 62 year-old company based in southern Japan.

The spread is compared with 9 basis points the utility paid for 0.35 percent notes offered three months before the quake, the data show. Utilities globally pay a yield premium of 140 basis points, the Bank of America Merrill Lynch index data show.

“Looking at the trend, we decided it was a good time to issue,” Kyushyu Electric Co spokesman Hirotake Kakehashi said.

“We anticipated sufficient demand in the market,” he added.

Hokuriku Electric Power Co, which serves the region along the Sea of Japan, was the last utility to sell bonds last month raising ¥20 billion of 1.158 percent 10-year notes at a spread of 47 basis points, according to Bloomberg data. The gap is 7 basis points wider than the previous offering in the tenor in August, the data show.

Japan will restart atomic power plants once their safety is reassured, even as the government seeks to reduce reliance on nuclear power as much as possible through energy-saving efforts and a shift to renewable sources, Abe said in a policy speech on Feb. 28.

His stance marks a turnaround from his predecessor, former Japanese prime minister Yoshihiko Noda, whose Democratic Party of Japan (DPJ) was voted out in December last year. The DPJ pledged to cut Japan’s dependence on atomic power to zero by 2030, after the worst nuclear disaster in more than two decades led to all 52 of the country’s nuclear reactors being shut down temporarily.

“The biggest reason for the spate of utility bond sales is the government change,” said Hisashi Hatta, director of investment at AISIN Employees’ Pension Fund, which oversees nearly US$1.8 billion of retirement money at Aisin Seiki Co, a parts maker for Toyota Motor Corp.

“Abe’s Liberal Democratic Party [LDP] is more supportive to those companies,” Hatta said.

Elsewhere in Japan’s credit markets, Marubeni Corp hired Citigroup Inc, Goldman Sachs Group Inc and JPMorgan Chase & Co to arrange fixed-income meetings that could result in a sale of US dollar-denominated debt, a person familiar with the matter said last week.

The note offering would be the first in the US currency since 2006 for Japan’s biggest trader of agricultural commodities, data compiled by Bloomberg show.

Japan’s corporate bonds handed investors a 0.41 percent return last month, compared with the 0.87 percent gain in the nation’s sovereign notes, according to Bank of America Merrill Lynch index data.

Company debt worldwide returned to 0.89 percent.

The yen weakened against the US dollar last week after Abe nominated Asian Development Bank president Haruhiko Kuroda, who has called for more monetary stimulus, to be the next Bank of Japan governor. Kuroda told the Japanese parliament on Monday that he aims to do whatever it takes to end the 15 years of deflation, and that open-ended asset purchases could start sooner than next year.

The scale and scope of the assets purchased by the central bank are so far not enough to achieve a 2 percent inflation target, Kuroda said.

Open-ended purchases are not due to start until next year.

The Japanese currency has lost 5 percent this year, the worst performer after the British pound among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

Japan’s benchmark 10-year rate fell half a basis point to 0.64 percent as of 11:29am in Tokyo on Tuesday, matching the lowest since June 2003, when the all-time low of 0.43 percent was reached. The securities yielded 120 basis points less than similar-maturity US Treasuries, compared with 107 a year earlier, data compiled by Bloomberg show.

Domestic companies issued ¥1.01 trillion in bonds last month, the most for a February in four years, Bloomberg data show. Softbank Corp was the biggest seller, with a ¥370 billion offering.

The record earthquake and subsequent tsunami on March 11, 2011, caused meltdowns and radiation leaks at Tokyo Electric Power Co’s Fukushima Dai-ichi nuclear power plant and led to the evacuation of about 160,000 people. The switch from nuclear to gas-fired generation after the accident forced Japan to increase liquefied natural gas imports 11 percent last year.

The utilities will have to pay a fuel bill of about ¥6.8 trillion in the year ending this month, almost double that in fiscal 2010, according to the government.

Japan’s 10 regional utilities, including Tokyo Electric and Kyushu Electric, have increased borrowings since the quake as their total net debt rose by 3 percent in the past two years to ¥22 trillion, according to their latest filings.

Kyushu Electric, which has ¥1.2 trillion in outstanding bonds, is rated “A3” by Moody’s Investors Service, its fourth-lowest investment level, Bloomberg data show.

“The rating reflects the economic, financial, and political conditions that are expected to make it more difficult for Kyushu Electric to continue recovering higher costs caused by the expanded thermal power generation on a timely basis,” Moody’s, which has a negative outlook on the utility’s grade, said in a statement on Feb. 22.

The yield premium on the utility’s ¥30 billion offering of 0.526 percent three-year notes was at 52 basis points on March 1, according to JS Price. The sale was priced in October last year at a 42 basis point spread, Bloomberg data show.

Kyushu Electric forecast its net loss to widen to ¥365 billion this fiscal year from ¥166 billion a year earlier, it said in a statement on Jan. 30. That would be the biggest shortfall since at least the year ended March 1995, according to Bloomberg data.

Even so, the utility’s credit outlook in the long run may be more positive after Abe took over. Hiroyuki Hosoda, an executive in the LDP, said in an interview with Bloomberg in November last year that Japan must restart its plants quickly after confirming they are safe, citing increasing energy prices.

“The regulatory framework is fundamentally supportive of the industry, from the long-term perspective,” Moody’s said in its report last month.