By Taiga Uranaka
TOKYO (Reuters) - The head of Tokyo Electric Power was hospitalized on Wednesday amid mounting concerns his utility may collapse under the strain of paying for Japan's worst nuclear disaster and force the government to act to stop the crisis spreading to other companies.
President Masataka Shimizu has, like his company, been under enormous pressure since the March 11 earthquake and tsunami struck the Fukushima Daiichi nuclear complex, causing radiation leaks, blackouts and massive evacuations.
Shares in Tokyo Electric, commonly known as TEPCO, dropped another 17.7 percent on Wednesday to 466 yen, their lowest in almost five decades, and were later untraded after reports of Shimizu's hospitalization. Chairman Tsunehisa Katsumata will take over operation of the power company, Asia's largest.
The cost of insuring its $91 billion in debt against default has jumped by as much 10 times since the quake, although reports the government may step in has seen that ease slightly.
Its main bank, Sumitomo Mitsui Financial Group, which is also a large shareholder with a 2.7 percent holding, fell 1.9 percent to 2,573 yen.
"We believe the stock could go to zero," an executive at a hedge fund with $1 billion invested in Asia told Reuters on condition he wasn't identified. His fund he said has been buying TEPCO debt because "we think the Japanese government will guarantee or nationalize it."
"What we have been doing is that we have been looking at senior secured debt. We have been buying basically."
BONDS VS SHARES
A de-facto government guarantee on its 7.5 trillion yen ($91 billion) in debt that any nationalization would defer will shore up bondholder confidence, but by then shareholders may see their equity wiped out. The stock is already down more than three-quarters since the disaster.
Although likened to the Gulf of Mexico oil spill that hammered oil company BP, a rapid deterioration in TEPCO's share price and financial standing may present Japan's government with a systemic problem more similar to the collapse of Lehman Brothers in 2008 and force it to act sooner than it anticipated.
"It's not just about the nationalization of TEPCO. You have to look at all the banks that are lending to the company, it's obvious that investors are going to look at their situation with a huge dose of skepticism," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
Japan's government said Tuesday it may nationalize Tokyo Electric, commonly known as TEPCO, as it struggles to cope with the rising cost of coping with Japan's worst nuclear disaster and likely compensation claims from households and businesses affected.
At the same time, its ability to meet those payments has been hobbled by a drop in capacity that will squeeze revenue for the foreseeable future.
BUCKET WITH HOLES
"TEPCO will have to pay enormous reparations, counted in trillions of yen, so the government obviously has to do something about the firm. But people wouldn't let the government keep pouring tax money into this company when it's like a bucket with holes in it," said Fuijto.
So far, however, Japan's government has yet to present any bailout plan, with some officials confident that an abundant cash flow will allow the utility to stand up to the financial strain.
A government official told Reuters that annual revenue of around 5 trillions yen and assets of 12 trillion yen would be enough. Other options open to the government to help TEPCO would be allowing it to raise electricity rates or to pick some or all of the compensation claims.
Dai-ichi Life Insurance, which is the second-largest shareholder in TEPCO with 4.1 percent stake, rose 1 percent after Deutsche Securities said the impact of TEPCO stock price fall is limited on its embedded value, a measure of an insurer's worth that includes the present value of future earnings from life insurance contracts.
Since the temblor struck, however, Dai-ichi shares have fallen 18 percent compared with a 10.3 percent decline in the benchmark Nikkei 225 index.
TEPCO provides electricity to a third of the Japanese population and usually operates enough capacity to power the whole of Britain.
While any nationalization would likely hurt shareholders, it could benefit bondholders, who would get a de-facto government guarantee on its 7.5 trillion yen ($91 billion) in debt.
The spread on TEPCO's domestic bonds stayed at 200 basis points, with no buyers or sellers, reported IFR, a Thomson Reuters publication.
TEPCO's three-year CDS blew out to a new record wide level of 510bp, meaning it cost $510,000 to insure $10 million of debt against default, IFR reported.
However, the five-year protection was quoted significantly lower at a range of 380bp-420bp compared to Monday's 450bp. The 5-year CDS was trading at about 40bp before the disaster.
($1 = 82.480 Japanese Yen)
(Additional reporting by Antoni Slodkowski and Nishant Kumar; Writing by Rodney Joyce and Tim Kelly; Editing by Chris Gallagher and Lincoln Feast)