30/03 Japan mulls Tokyo Electric nationalization; shares tank.

REUTERS

2011/03/30

.Japan may nationalize Asia's largest utility, Tokyo Electric Power , 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 on Tuesday, as the costs of compensating businesses and households affected by leaking radiation and the expense of repairing crippled nuclear reactors looked set to soar.

At the same time, the utility'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 yen ($6.1 billion) in debt bondholders would feel more confident that Tokyo Electric, known as TEPCO, can repay its loans, analysts said.

"If the government nationalizes TEPCO, I don't see any significant immediate impact on lenders and bond holders. 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.

Tokyo Electric's future has been tenuous since the March 11 earthquake and tsunami struck its Fukushima Daiichi 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 reported earlier had that some members of the government had proposed a plan for the state to take a majority stake in Tokyo Electric and help it pay for damages stemming from the nuclear accident.

One government source told Reuters 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 prepardness and handling of the disaster, with experts questioning its response and 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 will have pay more than $1 billion every month on alternative fuels 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 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 financial resources. The crisis appeared to escalate in the past few days with plutonium found in soil on Tuesday, rattling already shaky financial markets.

Ballooning costs could quickly eat through emergency financing from Japan's big banks, which are in talks to provide some $25 billion in loansStill, any political decision to bring TEPCO under state control may take some time. Chief Cabinet Secretary Yukio Edano had said earlier on Tuesday 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.

Tokyo Electric 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 yen, down 19 percent from Monday's close. The company has lost about $30 billion in market value since the March 11 disaster.

The spread on Tokyo Electric's 5-year credit default swaps widened to a record high of 475 basis points on Monday on Markit, against just 40 points before the crisis.

The utility, which provides power to about one-third of the Japanese population, 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 this year, and another $5.6 billion in 2012, underscoring the importance of refinancing to meet its funding needs.