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Tepco scheme likely to hit investor demand for other power firms

By Chikafumi Hodo

TOKYO (Reuters) - A government scheme to support massive compensation payouts from Tokyo Electric Power will likely hit investor appetite for other power companies in Japan as these firms must contribute funds to the plan.

The scheme, finalized on Friday, to compensate victims of the crisis at Tokyo Electric's <9501.T> tsunami-crippled nuclear plant is designed to protect bond holders and will keep Tepco shares listed, but markets responded unenthusiastically as a raft of uncertainties remain on the plan, especially concerning the power sector.

The government has not set a limit on Tokyo Electric's liabilities and it is unclear how much utilities will be expected to contribute to a fund to assist Tokyo Electric's compensation payments.

"Without knowing the details on how much other power companies have to contribute, investors will be very nervous about taking fresh exposure to the power sector," said Masaru Hamasaki, a senior strategist at Toyota Asset Management.

"One thing we are clear on is that Tepco's compensation liabilities will be massive, meaning that other companies will have to provide a lot of support. This will clearly be negative for the power utility industry as a whole."

Japan utility shares slumped across the board On Friday, with shares of Tokyo Electric <9501.T> falling as much as 9 percent to an intraday low of 438 yen at one point.

Shares of Chubu Electric Power <9502.T>, which is set to halt operations at it Hamaoka nuclear plant this weekend after a request from the government, dropped 2.0 percent, while Japan's No.2 power company Kansai Electric Power <9503.T> declined 3.0 percent.

Fund managers said serious long-term investors are not expected to hold Tepco shares as the company will be unable to pay dividends for the foreseeable future, meaning that any buyers are likely to be speculative day-traders.

"It will take at least 10 years or more for investors to consider Tepco a stock suitable for trading on fundamentals, with solid dividend payouts based on detailed earning outlooks," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

"If the government won't cap total compensation liabilities, it implies that it is prepared for potential class-action lawsuits. Taking such a possibility into consideration, who would want to hold the stock in the long-term?"

UNCERTAINTY SPREADS

Tokyo Electric bonds and credit spreads were little changed as of Friday morning despite the government saying the firm's outstanding bonds are expected to be serviced until maturity.

Tepco's five-year credit default swaps, or contracts insuring its five-year debt against default, were little changed around 211 basis points on Friday. They had widened to that level by late Thursday from 203 bps a day earlier.

Tepco's corporate bond spread was notionally assessed around 200 basis points over government bonds this week after narrowing to around 150 bps a week earlier.

Power companies, including Tepco, have been heavyweight issuers of Japanese corporate bonds, accounting for about 20 percent of the overall 70 trillion yen ($865 billion) market.

But issuance by power companies is expected to shrink as fund-raising costs are seen rising.

Bond investors will be careful about taking large positions in power company debt as the creditworthiness of these firms could deteriorate if they have to provide huge contributions to the Tepco compensation scheme, fund managers said.

In the past, bonds issued by Tepco and others power companies were treated similarly to Japanese government bonds, with their spreads only a few basis points above JGBs, but this will not happen anymore, bond market sources said.

"Debt issuance by power companies are secured bonds, so considering that demand for corporate debt in general is very strong, holders of power firm bonds will not sell them, but there will be big hurdles in taking fresh exposure to them," said Fumihito Gotoh, head of credit research at UBS Securities.

There have been no bond offerings from electric companies since the start of the Japanese financial year in April, after issuance of about 130 billion yen in April 2010.

($1 = 80.945 Japanese Yen)

(Additonal reporting by Hiroyasu Hoshi, Naoyuki Katayama, Daiki Iga, Ayai Tomisawa and Antoni Slodkowski; Editing by Joseph Radford)

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