S&P Cuts TEPCO’s Credit Rating To Junk (Likelihood Of A Default Increased To 53 Percent)

Tepco debt swaps facing 53% chance of defaulting (Japan Times, Bloomberg, June 2, 2011):

The cost of protecting Tokyo Electric Power Co.’s debt shows the likelihood of a default increased to 53 percent after the utility’s credit rating was cut to junk status by Standard & Poor’s.

The contracts to insure ¥6.85 trillion in bonds and loans of Tepco for five years jumped to as much as 913.5 basis points Tuesday, or ¥91.35 million per year to protect ¥1 billion of the debt, according to data provider CMA. That’s pricing in a 53 percent chance of default by 2016, according to data compiled by Bloomberg.

The probability of a company with B-rated debt defaulting during any five-year period between 1975 and 2010 was 19.14 percent, according to S&P’s research.

The debt downgrade came as the government is attempting to prevent Tepco from going bankrupt while trying to compensate those affected by the worst nuclear crisis since Chernobyl. Tepco may face claims of as much as ¥11 trillion for damages from its Fukushima No. 1 plant, according to a Bank of America Corp. Merrill Lynch estimate.

“Tepco’s default risk takes into account political risk,” Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management Co., said in an interview Tuesday. “With political support, they won’t fail, and without it they will. It’s one or the other, so I think 50 percent is fair.”

The cost of one-year swaps on Tepco climbed to 1,055.5 basis points Tuesday in Tokyo from 10 basis points on March 10, before the 9.0-magnitude earthquake and tsunami damaged reactors at the Tepco plant.

Swaps on Greece, which the European Commission forecast in November will have debt at 156 percent of gross domestic product in 2012, were at 2,297.5 basis points, up from 962.5 on Feb. 4, CMA data show. Greece contracts are pricing in a 34.9 percent chance of default by next June, assuming a 40 percent recovery for bondholders, according to data compiled by Bloomberg.

The power producer, which this month posted the biggest loss on record for a nonfinancial Japanese company, had its long-term corporate rating cut to B+ from BBB, the fourth reduction since March 18, when it was graded AA-, and short-term corporate rating cut to B from A-2, S&P said in a statement Monday.

“We are taking the rating downgrade seriously,” Ai Tanaka, a spokeswoman at the utility, said Tuesday. “We will try to restore confidence in the market and plan to rationalize our management and cut spending as we announced in our earnings statement.”

Tepco has ¥6.83 trillion in debt, making it the nation’s second-largest corporate borrower among members of the Nikkei 225 stock average, behind Mitsubishi UFJ Financial Group Inc., Bloomberg data show. A group of banks led by Sumitomo Mitsui Financial Group Inc. advanced ¥2 trillion in emergency loans to the utility after the quake.

As Tepco’s financial situation deteriorates, banks lending money to the company could be forced to restructure their loans, S&P said.

“Any waiver of loans or distressed restructuring, such as a lowering of interest rates on existing loans, constitutes a form of default and would trigger a lowering of the corporate credit ratings on Tepco to SD — Selective Default,” S&P said.

Japanese banks are resisting government calls for Tepco’s lenders to forgive loans or ease interest charges.

Leave a Comment