Japan mulls Tepco nationalisation; shares at 47 year low

Japan mulls Tepco nationalisation; shares at 47 year low

Tokyo: Japan may nationalise Tokyo Electric Power as mounting costs and public anger threaten the future of the company at the centre of the country’s deepening nuclear crisis.

The outlook for Tokyo Electric, known as Tepco, has been uncertain since the 11 March 2011 earthquake and tsunami struck its Fukushima Daiichi nuclear complex, causing radiation leaks, blackouts and massive evacuations. Its shares have fallen almost three-quarters and the cost of insuring its $92 billion in debt against default has jumped 10-fold.

Imposing state ownership on Asia’s largest utility is one option Japan is mulling, National strategy minister Koichiro Gemba said on Tuesday, as the cost of fixing broken reactors and compensating businesses and households soar.

At the same time, the utility’s ability to pay has been hobbled by a fall in generating capacity that is causing rolling blackouts that are expected to last for weeks if not months. Tepco provides electricity to a third of the Japanese population and usually operates enough capacity to power the whole of Britain.

“I see no other options than nationalising TEPCO," a fund manager at a major Japanese asset management firm said, declining to be identified because of the sensitivity of the issue. “People are so angry with the company and that anger won’t subside if the government just injects money and lets the management stay."

Shareholders will be hurt, but the risk of the company collapsing without government support would be tremendous, he added.

The disaster and prospect of nationalisation thumped Tepco shares, which closed down almost 19% at 566 yen on Tuesday -- their lowest since 1964.

One government source said that one plan being floated was to spin-off Tepco’s nuclear business into a separate company and nationalise that.

“The possibility is small that Tepco continues on in its current state," said the source, who was not authorised to speak publicly on the matter.

Bondholder boost

By getting a de-facto government guarantee on 7.5 trillion yen ($ 92 billion) in debt, bondholders would feel more confident that Tokyo Electric can repay its loans, analysts said.

“If there is nationalisation, it is difficult to see any meaningful haircut for creditors given that these are assets critical to the energy policy of the country," said Tim Jagger, a Singapore-based credit strategist with Royal Bank of Scotland.

The disaster is dragging on the share value of Tepco’s stockholders. Top shareholder Dai-ichi Life Insurance Co tumbled 5% on Tuesday as investors worried the state would take control of the utility, which is also 17% owned by foreign investors.

“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 nationalisation.

The Yomiuri reported earlier that some government members had proposed the state take a majority stake in Tepco and help it pay for damages stemming from the nuclear accident, which has also shone a light on the company’s chequered past.

At the time of the disaster, the Fukushima plant was stacked high with more spent fuel than it was originally designed to hold, according to company documents and outside experts. The plant had also repeatedly missed mandatory safety checks over the past decade and was suspected of falsifying safety documents.

Heavy debt load

Even before compensation claims are filed, the crippled former state-owned utility faces higher costs.

Nomura Holdings analyst Shigeki Matsumoto said in March 2011 that Tepco will have to pay more than $1 billion every month on oil and gas to make up for lost capacity. With reactors likely to be off line for a long time, that expense will mount.

Tepco took almost two years to restart reactors at its Kashiwaki-Kariwa plant, the world’s biggest, after an earthquake there halted generation in 2007, Matsumoto said, although the damage was far less severe than at Fukushima.

With radiation still leaking, the final bill could quickly empty Tepco’s coffers including $25 billion in emergency financing it has requested from Japan’s big banks.

The crisis appeared to escalate in the past few days with plutonium found in soil on Tuesday at the plant, rattling already shaky financial markets.

Expectations of a government takeover make it easier for Tepco to extend its credit and allow it to tap capital markets, said Yoshinobu Yamada, a bank analyst at Deutsche Securities.

“Since the government would back them up, I don’t see them defaulting on loans. If they are nationalised their credit rating would rise," Yamada said.

Still, any political decision to takeover Tepco may take some time. Chief cabinet secretary Yukio Edano said earlier on Tuesday the government was not yet considering nationalisation.

“At this point, it is my understanding that government institutions are not considering such a move," he said.

Tepco spokesman Hajime Motojuku said he was unaware of any nationalisation plan. “Our first and biggest priority at this moment is to prevent the nuclear power plant accident from worsening further," he said.

Nonetheless, talk of nationalisation is eroding shareholder value.

“As long as there are concerns that Tepco may be nationalised, investors don’t want to hold the stock. Passive funds are selling too," said Hajime Nakajima, a trader at Cosmo Securities in Tokyo

The spread on Tokyo Electric’s 5-year credit default swaps widened to 405 basis points on Monday on Markit , against just 40 points before the crisis.

The utility had 432 billion yen in cash and equivalents at the end of December, according to its financial statements.

Of its roughly $64 billion in outstanding bonds, the company is due to repay $4.8 billion in 2011, and another $5.6 billion in 2012, underscoring the importance of refinancing to meet its funding needs.

“For the credit investment point of view, nationalisation is definitely positive," Nomura Holding’s chief credit analyst, Toshihiro Uomoto, said in a report. “The nationalisation would create a greater sense of security."