UPDATE 3-Japan nuclear operator bond drought set to end

Wed Feb 22, 2012 4:49am EST

Related Topics

* Tohoku bond would be first by nuclear operator since Fukushima

* Lender confidence in utilities shattered by nuclear crisis

* $313 mln Tohoku issue expected in two tranches (Adds comment from Tohoku Electric)

By Naohiro Katayama

TOKYO, Feb 22 (Reuters) - A drought in bond issuance by Japanese nuclear plant operators after lender confidence in the industry was shattered by the Fukushima crisis looks set to end, with Tohoku Electric Power Co Inc considering a $313 million offering.

Japan's $777 billion corporate debt market was dealt a hammer blow when the March 11 earthquake and tsunami wrecked Fukushima Daiichi nuclear plant and triggered radiation leaks, leaving plant operator Tokyo Electric with its once-stellar credit status in tatters.

The two-tranche bond by neighbouring Tohoku Electric would mark the first debt issuance by a nuclear plant operator since the crisis. The last was on March 2 last year, when Hokkaido Electric Power offered 15 billion yen ($188 million).

Tohoku Electric, covering much of the area devastated by the March events, is tapping the debt market because it is in bigger need of funds than other utilities to restore facilities hit by both that disaster and heavy rain in the summer.

"We've been studying for opportunities to issue bonds from the standpoint of securing funds more stably," a company source familiar with the matter told Reuters.

"We concluded we could resume bond issuance after holding talks with securities firms and sounding out investors."

Tohoku's bond could draw demand from institutional investors if it can offer attractive spreads, market experts say.

"Investors' concern is whether further prolonged suspension of nuclear power facilities would affect earnings of utility firms, including Tohoku," said Masaru Hamasaki, a senior strategist at Toyota Asset Management.

"But at the same time investors are struggling to raise returns. So Tohoku's bonds will be able to attract investor interest if it can provide attractive spreads."

Public safety fears about nuclear power have prevented the restart of reactors shut for routine checks, forcing utilities to import more fossil fuels and gas to run their power generators and supply electricity, choking their profits.

The last two of Japan's 54 reactors still operating are due to close by late April, and none can restart until they meet new safety checks and receive clearance from the central and local governments.

Some institutional investors are wary of buying utility bonds given the uncertainty surrounding the sector, while investors also question the liquidity of the bonds, analysts said.

"There are investors who are reducing exposure to utility bonds by refraining from reallocating funds to the sector after maturity. So some investors could be less enthusiastic," said a senior fund manager at a Japanese asset management company.

The business environment for utilities will remain tough as their income is expected to be restrained with both households and companies being urged to use less electricity.

High fuel costs will also weigh on their earnings if they have to rely on thermal power.

Tohoku is set to issue 20 billion yen in five-year bonds and 5 billion yen in 10-year debt by the end of next week, company sources familiar with the matter said.

It has appointed Nomura Securities and Daiwa Securities Capital Markets to jointly lead-manage the five-year bonds, with Mizuho Securities handling the 10-year debt.

HIGH SPREADS IN DEMAND

Spreads on Tohoku Electric's five-year bonds were assessed slightly above 50 basis points over the yield on the equivalent Japanese government bonds, bond traders said.

Before the radiation crisis, utility bonds were regarded as nearly equal to JGBs, with spreads for them offered around 5 to 6 bps.

"I feel Tohoku bonds could generate a lot attention if they can offer a spread slightly above the market level. Investors are very hungry for yields at a time when JGBs are pegged at low levels," Hamasaki said.

The yield on the five-year JGB stood at 0.310 percent on Wednesday.

A successful launch by Tohoku Electric could pave the way for other utilities to follow suit in the near term.

"There is a possibility that Tohoku Electric's possible issuance could become a touchstone for other utilities, beside Tokyo Electric, to resume bond issuance," Akane Enatsu, a senior credit analyst at Barclays Capital, wrote in a client report.

Attempts by Kansai Electric Power and Kyushu Electric Power to tap the corporate bond market last June foundered when they failed to drum up investor interest.

There was more success for Okinawa Electric Power with a 10 billion yen issue of 10-year bonds in June, though it has no nuclear plants.

The resumption of bond issuance would come as a relief for utilities, which have had to rely mainly on bank loans to raise funds, analysts said.

A total of about 1.49 trillion yen worth of bonds issued by nine major electric power companies are due to mature in the financial year starting on April 1.

That compares with 1.35 trillion yen in utility bonds maturing in the current financial year.

"The issuance could be positive for the industry as a whole as power companies will be able to diversify their fund-raising," Toyota Asset's Hamasaki said. ($1 = 79.7500 Japanese yen) (Additional reporting by Nobuhiro Kubo and Chikafumi Hodo; Editing by Joseph Radford and Michael Watson)

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