Lights dim for Japan's nuclear utilities

By Mia Stubbs

TOKYO, April 4 (IFR) - As the future of Tokyo Electric Power remains in question, concerns are building over how other nuclear power operating electric power companies (Epcos) will fund themselves going forward.

As losses pile up, the choices are stark. The companies need either to fully resume operating their nuclear plants, or hike their customer tariffs by 20% to boost their flagging revenues.

But the government, judging from recent official pronouncements, seems unwilling to sanction either of these options in the face of stiff opposition from the public.

The City of Osaka, for instance, one of the major shareholders of Kansai Electric, Japan's second biggest Epco, has announced it will table a motion to renounce nuclear energy at the next shareholder assembly in June. The city also resisted Kansai's campaign to impose consumption restrictions on the city last summer.

As their sources of revenue decline, some have expressed hopes that the government could bail out the Epcos yet again. However, Yukio Edano, the outspoken minister for economy, trade and industry, has instead dashed expectations by slowly but surely eroding the assumption that loss-making utilities will be protected by the state.

The day of reckoning, though, could be near. Both Kansai and Chubu, Toyota's principal supplier and Japan's third largest Epco, have significant bond maturities looming and do not seem in any fit shape to meet them.

Their cash on hand barely covers redemptions due in the coming year: Kansai posted cash of JPY152bn at the end of December 2011, up from JPY96bn at the end of March, but has JPY147bn of bonds maturing this year and JPY220bn in the year ending March 2014.

Meanwhile, the losses keep on coming. Kansai Electric is forecasting a net loss of JPY253bn in the year to March 2011, and Chubu is looking at a figure of JPY120bn. Even the smallest Epcos are staring at losses ranging from JPY170bn for Kyushu to JPY5bn for Chugoku.

Seemingly unconcerned by the poor outlook, markets appear confident that the sole providers of what is an absolute necessity, electricity, will somehow stay afloat. Kansai's five-year CDS remains at 167bp/192bp, and Chubu's at 142bp/167bp, according to Markit data.

Rating agencies also seem to hold out some hope: Moody's and R&I have merely put the two utilities' A1 and AA ratings on review for downgrade. Yet, Starmine's "smart ratio" ratings suggest both Kansai and Chubu should be rated in the borderline default CCC-zone.

WILL INVESTORS PULL THE PLUG?

In spite of the seemingly placid market-take on the Epcos, all of them - save Tohoku Electric which is based in the region stricken by last year's earthquake - have been shut out of the bond markets. In the past year, they have only been able to fund their operations by issuing commercial paper and taking on bank debt.

But "banks may decide to raise loan costs once they take into account the concentration risk," warns Takayuki Atake, chief credit analyst at SMBC Nikko.

Indeed, the latest setback over Tepco's restructuring suggests even the mega banks are getting cold feet over providing unsecured loans to their utility clients.

Lenders have resorted to creating a bond structure for their next loan to Tepco, given that under Japanese law, holders of utility bonds are senior to all other creditors and have recourse to the company's assets.

Still, for now, it seems like there still could be a glimmer of hope for these companies in the debt capital markets. There is speculation they could issue bonds later this year, and find demand for them too, simply because of supply dynamics.

"The drying up of electricity company bond issuance leaves a big hole of around JPY1tn (in total bond supply)," points out Atake. "While supply remains tight, investor demand for bonds remains strong," he added.

It is no coincidence that corporate bond issuance in Japan was down 17% to JPY8.2tn in the fiscal year and that Epcos represent 20% of total outstanding yen corporate bonds.

But it is unclear whether the utilities will accept to pay what is considered the new benchmark spread for utilities: the 55bp over JGBs that Tohoku Electric's "solidarity" JPY60bn five- and 10-year bond offering paid in early March.

Before the earthquake, the utilities were seen as quasi government issuers and paid scanty spreads of around 10bp over JGBs. At the end of March 2011, Kansai Electric was balking at paying 20bp over, and last June, faced with a potential plus 27bp-34bp spread, pulled its mandated JPY30bn deal.

Now, even Tohoku's 55bp over may be just the starting point. While some credit analysts insisted Kansai and Chubu Electric could price some 10bp tight to Tohoku given their better ratings, one major bond investor disagreed. "Tohoku priced at solidarity spreads," he said. "The others must pay more - we don't even know if the utilities will continue to exist in their current form in a decade."

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