The news last week that the Japanese government was close to agreeing a bailout plan for Tepco, the electricity company that owns the Fukushima nuclear plant, should have come as a relief for the company and its debt holders.
But the opposite appears to be true. Amid uncertainty over the structure of the bailout and when it might finally be agreed, Moody’s has taken the proactive step of downgrading the company’s debt, saying that the plan as it looks so far actually increases the risk of a default.
The clause that particularly seems to trouble the ratings agency is the one that Tepco will only be insured for compensation payments of up to Y120bn. Anything above that limit will be the company’s liability.
This condition was set by the Atomic Energy Damage Compensation Law, but investors had never seen that law tested, and hoped that when it came to an accident, the government would be willing to underwrite more than that.
According to Moody’s:
For such payments, Tepco will receive funding and other forms of support from the new organisation and will then make repayments based on special contributions from operating cash flow over a long time frame.
While spreading payments out over many years could enable Tepco to remain financially viable, a substantial drain on cash flow for a prolonged period would, in Moody’s view, reduce the company’s financial flexibility and diminish its capacity to pay other obligations.
Just as damaging are the comments from Yukio Edano, the chief government spokesman, who suggested that an injection of public money could not take place without a haircut from the banks.
Edano said it would be “impossible” to win public support for the plan unless the banks forgave some of the Y2,000bn in loans they provided Tepco before the earthquake. He even suggested government could backtrack on its plan to inject public money into Tepco if the banks did not forgive part of these loans.
Meanwhile a third piece of bad news has hit the company: water levels in its No 1 reactor were on Thursday found to be lower than expected, suggesting it was leaking radioactive water and could take longer to stabilise than hoped.
Now the company and its creditors must endure a potentially long and turbulent wait as the rescue plan makes its way through the fractious Japanes parliament, with some politicians seeing this as the perfect chance to give Prime Minister Naoto Kan a kicking. Lots of clouds, few silver linings.