Bank Of Lynch Estimates TEPCO Losses Up To ¥10 Trillion, Believes Firm Is TBTF For Bond Impairments

Tyler Durden's picture

After losing almost 80% of their investment in 3 weeks, here come more bad news for TEPCO shareholders. According to Yusuke Ueda analyst for Bank of Lynch TEPCO shareholders may be wiped out by clean-up costs and liabilities. "The amount of compensation demanded of TEPCO will also vary considerably depending on how long it takes to resolve the nuclear reactor crisis. Below we set out our assessment of the nuclear power damage under the scenarios we envisage and of TEPCO’s credit enhancements in each scenario. We think TEPCO will face compensation claim demands of less than ¥1tn if the nuclear reactor accident can be resolved swiftly (roughly within two months). If the problems take a longer time to resolve (up to about six months or so), we estimate that compensation claims could amount to ¥2.4-3tn.The total could potentially reach ¥10tn under a worst-case scenario (about two years needed to resolve the nuclear power plant accident). Shareholders are very likely to be held liable, through capital reductions of a certain amount, so as to clarify responsibility for damage compensation, but given the principle of maintaining stable supplies of electric power, a scheme involving a default on the company's bonds is very unlikely to be adopted." Which means when the Nikkei opens up tonight look for another demonstration of Xeno's paradox where the stock continues selling off but never reaching zero.

As for CDS, Merrill America reaffirms our view that after surging to nearly 500, spreads will likely tighten all the way to JGBs as TEPCO's credit risk becomes equivalent to that of Japan:

We outline our views on TEPCO's bond and credit trends. As we just noted, a scheme involving a default on the company's bonds is very unlikely to be adopted. We thus do not see much likelihood of a drastic widening of spreads. If a compensation scheme involving clear government participation is proposed, the spreads may actually stabilize.

The same is applicable to TEPCO's CDS. If we consider the possibility of a portion of the unsecured loans being converted to equity, though, there could be ways for restructuring to apply, depending on these schemes (currently beyond our assumption). As long as these vague concerns exist, TEPCO's CDS and bond spreads are very likely to widen, even if such a scheme could not be thought of.

In any event, we think it is very unlikely that TEPCO will end up in legal bankruptcy, considering its importance as a provider of a key part of the infrastructure, electricity.

However, a crucial premise of the assumptions above is that the DPJ cabinet has a common-sense understanding of Japan's industrial infrastructure and the stability of the financial markets and financial system and will implement
reasonable reconstruction policies.

If the DPJ, as an election ploy and to bolster its approval ratings, demands that TEPCO cover a ridiculous amount of quake-related damages based on some needlessly vague criteria and without serious thought about how the damages will be covered, and as an arbitrary result TEPCO is pushed to seek legal bankruptcy protection, the outcome would be anything but industrial development. A second financial crisis, one originating in Japan, could arise as a result of a ¥5tn default and the market's loss of confidence in other utilities. We hope that the DPJ-ledgovernment recognizes that electric power companies, providers of a key part of the industrial infrastructure, and the financial system's stability are crucial conditions for reconstruction and will accordingly adopt balanced policies.

Let's all hope that Bank of Lynch is right and Japan realizes that America's preeminent bad mortgage bank, among others, will be very much impaired, unless losses are again socialized, and some of the world's biggest institutions are forced to be see full impairment on their bond holdings.... Where have we seen this before? Perhaps just to make sure, BAC should send in Hank Paulson with a three page term sheet explaining just how things really work in a central planned kleptocratic regime.

Full report:

TEPCO Merrill

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CD's picture

Minor & not unexpected detail, in the grand scheme of things -- but unusual for IAEA to admit to problems:


IAEA worried about radiation in Japan village

VIENNA — Radiation levels recorded at a village outside the evacuation zone around the quake-striken Fukushima nuclear plant are above safe levels, the UN atomic watchdog said Wednesday.

The International Atomic Energy Agency said safe limits had been exceeded at Iitate village, 40 kilometres (25 miles) northwest of Fukushima, well outside the government-imposed 20 kilometre exclusion zone and the 30-kilometre "stay indoors" zone.



According to Elena Buglova, head of the IAEA's Incident and Emergency Centre, the reading in Iitate village was 2 megabecquerels per square metre. 

That was a "ratio about two times higher than levels" at which the agency recommends evacuations, she explained.

redpill's picture

Absolutely absurd that the evac zone is still only 20km given that the situation is out of control.


TraderMark's picture

Just make TEPCO a bank holding company under the Fed's wing.  Problem solved. 

redpill's picture

Luckily ¥10 Trillion isn't what it used to be.

Robot Traders Mom's picture

@ Tyler-I like Bank of Lynch, but can you start referring to them as Lynch America?

Dollar Bill Hiccup's picture

Sorry Mrs. Robo Mom, I missed your post before I posted below.

That's even funnier ...

plocequ1's picture

I am a Taxpayer. I will handle it.

RobotTrader's picture

Ah, big deal...

Another problem to be swept under the rug.

Bank of Japan will print the necessary trillions, perhaps quadrillions of yen to paper over this problem.

monkeyfaction's picture

Holy fuck. Bonds are not supposed to be risk free. If you own bonds in a company that has the potential to cause a nuclear disaster or an Irish bank that lent $1000000000000 dollars to a homeless person you are taking on some of that risk. This TBTF shit has gone too far.


ZackAttack's picture

The Debt Peonage system only works if the rule of bondholders is upheld at all costs. This is why Ireland going off-script is so dangerous to the banksters. They'd do a partial default, the apocalypse wouldn't occur, and everyone else would be emboldened.

For Japan, let me make a guess about how the script plays out:

- TEPCO's bondholders are made whole

- TEPCO's private liabilities go onto the Japanese government's balance sheet

- ONLY after that happens, Merrill calls for the Japanese government to undertake severe austerity measures.


oogs66's picture

Agreed! I don't understand the argument for saving bondholders! Power will continue regardless of bondholders losing - as they should!!!

PulauHantu29's picture

So what are Japan's choices to pay the Trillions of Yen to rebuild, repair, bail out, etc.?

They can print and buy bonds flooding their markets with Yen (as Ben and the EU CB did);


Dump some of the US Treasuries to raise money and pay for the damages.Both are inflationary and the second would be very bad for the USA and prob bring Ben to tears.

DNB-sore's picture

are we seeing a bit of a free market? Someone is going to billed, lets put it in a share in debt per capita

Dollar Bill Hiccup's picture

Bank of Lynch, now that is very very funny.

Or maybe it's what comes to mind, bankers and a lynch mob ...

Bruce Krasting's picture

10 T divided by 82 comes to $121 billion. That is a lot of money. It is chump change if this goes bad. I am taking the 'over' from BAML on this one. Sorry.

Dollar Bill Hiccup's picture

A lot of money would be the $1Tn that we've pissed away in the desert sands of Iraq.

Assuming $5Bn a plant, you could build 200 nuclear plants with the latest technology for $1Tn. That's enough electricity to convert the entire gas fueled passenger fleet to electric while still doubling nuclear's share of electricity production (assumes 142Bn gallons gas @ 5.2Bn KWh w/ electric efficiency 4x, for 1.3Bn KWh needed, versus 2.4Bn KWh generated by 200 new plants).

It could be done. The US Navy has reactors inside of ships! Containment vessels could be made that are impregnable. It could be fail safe. Instead, we have private companies driven by greed to cut corners and make more profit. Nuclear CDOs.

Your over may come out something like that same $1Tn.

onlooker's picture

UPS trucks lined up at Fort Knox loading titanium bars for shipment to Tepco for conversion to T Bills to convert to US dollars. Pemco opts for titanium bars instead of T Bills. Titanium risk off. US dollar to be halfsized to reduce paper costs.

FischerBlack's picture

Bank of Lynch America Countrywide

RoRoTrader's picture

And the NIkki runs up 300 points........who would have thought?

But, that is money printing and not unlike the tsunami in its power, speed and surprise to overwhelm completely, either.

Watch for the Nikki daily to clear the 9800 200 MA. If that happens then its 1500 for the S&P.

The FED wants to see ZH "get its mind right".

ragedmaximus's picture

 SOMEHOW SOMEWAY the AMERICAN TAXPAYER will surely pay for this also.