Investors may slowly unload TEPCO bonds

Holders of corporate bonds issued by Tokyo Electric Power , the operator of Japan's stricken nuclear plant, see little chance of default but may try to gradually unload them when the market returns to an even keel.
The crisis at Tokyo Electric (TEPCO) has destabilised Japan's entire $860 billion corporate bond market, where TEPCO is the biggest issuer accounting for 8 percent and other utilities, which have also seen their fund-raising costs rise, account for around 13 percent.
Asset managers said selling TEPCO bonds when they are trading at a deep discount makes no sense, but longer-term some may prefer to remove the now stigmatised company from their portfolios - which may open the way for foreign hedge funds and other buyers of distressed assets to enter the market.
"We still have TEPCO bonds as the price falls are much smaller than those of its shares," said Takehiko Watabe, general manager of Fukoku Mutual Life Insurance's financial and investment planning section.
"I'm not sure what is going to happen to TEPCO shares, but I don't see any risk of TEPCO defaulting, so there is no need to act immediately."
The March 11 earthquake and tsunami ripped through Tokyo Electric's Fukushima Daiichi nuclear plant, triggering radiation leaks in the world's worst nuclear crisis in 25 years. TEPCO shares have lost three-fourths of their value.
Credit spreads for TEPCO bonds widened dramatically after the disaster to around 400-500 basis points above equivalent Japanese government bonds and the spread is currently notionally assessed at about 100-200 basis points, compared to around 8 basis points before the quake.
TEPCO's five-year credit default swaps, contracts insuring its five-year debt against default, stood around 215 basis points on Thursday after peaking at more than 400 basis points in late March.
"The current widening in spreads is overdone," said Haruyasu Hirata, deputy general manager of investment strategy at Japan's No.4 life insurer Sumitomo Life, adding that he does not expect the company to collapse.
The government has rejected the possibility of nationalisation and sources have told Reuters it plans to set up a fund that will help TEPCO with compensation claims. But it is not yet clear whether the government will put a cap on TEPCO's burden.
The potential for mammoth claims - Bank of America-Merrill Lynch has estimated that the bill could reach $130 billion if the crisis continues for two years - means that the chance of senior debt holders being asked to take a haircut cannot be completely ruled out.
"We just want a clear message from the government that all TEPCO debt will be serviced until maturity and no bond holders will be affected," said a fund manager at a Japanese financial institution, asking not to be identified.
"This kind of message will be very important as TEPCO has to return to tap the market in the long run," he said.
That possibility of a haircut, still seen as very small, as well as the risk that life insurers and pension funds may ultimately look to part with bonds carrying such a sullied corporate reputation may mean some unloading down the track.
"Obviously, TEPCO bond holders won't rush to sell now because we know that we'll be forced to sell at a massive discount," said a fund manager at a separate financial institution.
If a TEPCO bondholder at this point did decide to sell a sizeable amount, say several billion yen or so, then the bonds may have to be offered at a spread of 700 basis points or more, market players said. Investors are closely watching how credit ratings agencies react to the compensation scheme still being worked on by the government.
Many would likely dump TEPCO bonds if ratings were lowered to the triple-B (BBB) category by all agencies, including two Japanese firms - Rating and Investment Information (R&I) and Japan Credit Rating Agency (JCR), underwriting sources said. R&I rates TEPCO bonds at single A (A) while JCR ranks the bonds double A (AA).