Tokyo Electric says $24 billion loans not enough

TOKYO Wed Mar 30, 2011 7:30am EDT

Tokyo Electric Power Company, Inc. (TEPCO) Chairman Tsunehisa Katsumata (C) and Executive Vice-Presidents Sakae Muto (R) and Takashi Fujimoto attend a news conference at the company's head office in Tokyo March 30, 2011. Tokyo Electric Power has secured $24 billion in bank loans but said it would not be enough to keep the company running, adding to fears the utility may collapse under the strain of paying for Japan's worst nuclear disaster. REUTERS/Toru Hanai

Tokyo Electric Power Company, Inc. (TEPCO) Chairman Tsunehisa Katsumata (C) and Executive Vice-Presidents Sakae Muto (R) and Takashi Fujimoto attend a news conference at the company's head office in Tokyo March 30, 2011. Tokyo Electric Power has secured $24 billion in bank loans but said it would not be enough to keep the company running, adding to fears the utility may collapse under the strain of paying for Japan's worst nuclear disaster.

Credit: Reuters/Toru Hanai

TOKYO (Reuters) - Tokyo Electric Power warned on Wednesday that a $24 billion bank loan was not enough to keep it afloat and pay for Japan's worst nuclear disaster, adding to expectations the government will step in to bail out the stricken company.

Asia's largest utility, whose share price has crashed nearly 80 percent since the March 11 earthquake and tsunami that sparked the crisis, said its president had been hospitalized and Chairman Tsunehisa Katsumata will take over his responsibilities.

The prime minister and other lawmakers have lambasted Tokyo Electric, known as TEPCO, for its handling of the disaster. The utility has sown anxiety among the public by giving confusing radiation readings as it raced against time to prevent reactors from overheating and many Japanese say they don't trust what its officials say.

Katsumata told a news conference that TEPCO had not had time to estimate the financial impact of the disaster at its Fukushima nuclear plant but expected it to be "very severe."

The company had secured 2 trillion yen ($24 billion) in loans from lenders led by Sumitomo Mitsui Financial Group, but that was not enough given fuel and other costs.

TEPCO would discuss with the government how to ensure it had adequate funding, he said, to get through a disaster that has caused radiation leaks, rolling power blackouts and the evacuation of tens of thousands of people.

"There are lots of discussion about nationalization, but I will do my best to ensure TEPCO remains as a private company," Katsumata said.

Analysts see scant chance the company, which provides electricity to a third of the Japanese population, can survive in its current form.

"TEPCO will have to pay enormous reparations, counted in trillions of yen, so the government obviously has to do something about the firm," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

"But people wouldn't let the government keep pouring tax money into this company when it's like a bucket with holes in it."

BONDS VS SHARES

Although likened by some to the Gulf of Mexico oil spill that hammered oil company BP, TEPCO's financial standing and rapid deterioration in its share price may present Japan's government with a systemic problem more similar to the collapse of Lehman Brothers in 2008 and force it to act sooner to bolster the company than anticipated.

"It's not just about the nationalization of TEPCO. You have to look at all the banks that are lending to the company, it's obvious that investors are going to look at their situation with a huge dose of skepticism," Fujito said.

Shares in TEPCO, which closed at their lowest level in nearly five decades on Tuesday, dropped another 17.7 percent to 466 yen on Wednesday and were later untraded after the company said President Masataka Shimizu had been taken to hospital for high blood pressure and dizziness.

Shimizu has not been seen in public since a March 13 press briefing, and speculation had swirled about his leadership. His chairman said he had shown no intention to resign and was expected to be back at work soon.

TEPCO has been roundly criticized for its preparedness and response to the disaster.

As the company struggled to communicate what was happening at the site, Prime Minister Naoto Kan reportedly demanded at one stage that company executives tell him: "What the hell is going on?"

Experts have also questioned why so much spent fuel was kept at the plant and whether officials ignored concerns raised about its vulnerability to such a natural disaster.

The president of the company and four other senior officials were forced to resign in 2002 to take responsibility for suspected falsification of safety records.

Some investors see worse to come for the company.

"We believe the stock could go to zero," an executive at a hedge fund with $1 billion invested in Asia told Reuters on condition he wasn't identified. His fund he said has been buying TEPCO debt because "we think the Japanese government will guarantee or nationalize it."

"What we have been doing is that we have been looking at senior secured debt. We have been buying basically."

TEPCO has around $91 billion in debt, which excludes the latest loan but includes some $64 billion in bonds. The cost of insuring against default has jumped by as much 10 times since the quake, although that eased slightly after reports the government may step in to nationalize the company.

The spread on TEPCO's domestic bonds stayed at 200 basis points, with no buyers or sellers, according to a Wednesday report in IFR, a Thomson Reuters publication.

TEPCO's three-year CDS blew out to their widest level on record at 510 basis points (bps), meaning it costs $510,000 to insure $10 million of debt against default, IFR reported.

However, quotes on five-year protection narrowed significantly to a range of 380 bps to 420 bps from Monday's 450 bps. Before the disaster, five-year protection cost about 40 bps.

A de-facto government guarantee on its debt that any nationalization would infer will shore up bondholder confidence, but by then shareholders may see their equity wiped out.

CASHFLOW HIT

Compensation and rebuilding claims are expected to be substantial. The government has evacuated 70,000 people from around the plant and is considering expanding that to include another 130,000 people.

The government has banned the sale of spinach from four prefectures around the plant and raw milk from the Fukushima prefecture.

TEPCO's cashflow is also under pressure as it pays more for alternative fuels and struggles to rebuild generation capacity.

Nomura Holdings analyst Shigeki Matsumoto said this month that TEPCO will have 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.

It was inevitable TEPCO would have to scrap four of its six reactors at the Fukushima Daiichi plant, Chairman Katsumata told the news conference.

A government official told Reuters that TEPCO's annual revenue of around 5 trillion yen and assets of 12 trillion yen would be enough to keep the company going.

Other options to help TEPCO would be allowing it to raise electricity rates or for the government to pick some or all of the compensation claims.

But the prospect of a nationalization caused ripples with TEPCO shareholders.

Shares in TEPCO's main bank, SMFG, which is also a large shareholder with a 2.7 percent holding, fell 1.8 percent as the benchmark Nikkei average rallied 2.6 percent.

Dai-ichi Life Insurance, which is the second-largest shareholder in TEPCO with 4.1 percent stake, rose 3.6 percent after Deutsche Securities said the impact of TEPCO stock price fall is limited on its embedded value, a measure of an insurer's worth that includes the present value of future earnings from life insurance contracts.

Since the temblor struck, however, Dai-ichi shares have fallen about 16 percent compared with a decline of around 5 percent in the benchmark Nikkei 225 index.

($1=82.480 Japanese Yen)

(Additional reporting by Antoni Slodkowski, Tim Kelly and Nishant Kumar; Writing by Lincoln Feast; Editing by Chris Gallagher and Neil Fullick)

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