Thursday, March 24, 2011

Banks Sending Mixed Signals to Tepco (PINK:TKECF) (TYO:9501)



Current Exchange Rate, JPY 1 = 0.0124 USD

Maizuru - Japan's largest banks including king pin Mitsubishi UFJ Financial Group are considering loans of ¥1 trillion to ¥ 2 trillion to Tokyo Electric (knows as Tepco) the operator of the troubled Fukushima Daiichi plant. The company's power plant was damaged on March 11, by an earthquake and tsunami which knocked out the plant's power supply causing the reactors to overheat. The company has recently been able to restore power to all 6 reactors, which should decrease the amount of radiation being emitted as the reactors cool down.

The loans will be used to fix damaged plants and for reconstruction efforts. The amount startled investors as the stock reversed an early 5% gain in Tokyo trading yesterday to a near 5% loss to ¥1049 on the Tokyo Stock Exchange. Investors could be wondering if Tepco will be held responsible for the damages associated with their leaking power plant. Yukio Edano, Chief Cabinet Secretary of the Democratic Party of Japan certainly thinks so; he said the state would “have Tepco take responsibility.” Edano added that if Tepco is unable to compensate the individuals then the government would step in. According to Japanese law a company is not held responsible only if the disaster occurred due to a "exceptional natural disaster." The Japanese government has not yet called the incident exceptional and it has never before called an incident exceptional. However if the largest recorded earthquake in Japanese history is unexceptional then what is?

The company is either borrowing the money because the damage is worse than anticipated to all their plants not just the one in Fukushima, or the company could also be using the cheap credit now available to make upgrades to their infrastructure. Given the low interest rate environment in Japan, and the low percentage that Tokyo Electric currently borrows at which is 1.8%, the company would still be able to remain profitable in a normalized year even with this virtuous amount of debt . If the company needs ¥ 25 billion worth of repairs then many of the assets on the balance sheet are likely currently substantially impaired.

Penn Bowers of CLSA Asia Pacific said "Given the amount of cash on the balance sheet, I am surprised at the urgency of talks but certainly the need to prevent a crisis of confidence could be seen as necessary to keep recovery efforts stable." Tepco currently has ¥ 432 billion of cash on hand.

A spokesman at one of the banks was unable to comment on the specific amount of the debt the company would issue. The stock is down close to 50% since March 11, wiping off close to ¥1.7 trillion of market capitalization in the process.

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