Extra Yields Lure Japan Investors to Riskier Power-Company Debt

(Bloomberg) — Japanese power companies are flocking to sell hybrid bonds to bolster their balance sheets, offering investors a rare chance to earn extra yields in a usually stable sector.

Article content

(Bloomberg) — Japanese power companies are flocking to sell hybrid bonds to bolster their balance sheets, offering investors a rare chance to earn extra yields in a usually stable sector.

Article content

Soaring fuel prices and a weakening yen are pressuring the bottom lines of utilities, and that’s prompted them to issue notes that effectly are considered equity to create a financial buffer. Tohoku Electric Power Co. is planning a sale of about 100 billion yen ($731 million) of hybrid debt as soon as next month, following a 220 billion yen deal by Kansai Electric Power Co. in March.

Utilities have traditionally been one of the most conservative investments for Japanese debt buyers, and the firms only started selling riskier hybrid bonds in 2020 when Japan eased issuance restrictions on the sector. While the notes are pricier than normal debt for issuers, they let the power companies raise funds without affecting their credit ratings usually due to their structure.

Article content

For investors, the notes entice with a possible pick-up in returns at a time when corporate-note yields remain relatively low in Japan despite climbing recently in line with global peers. Receding expectations that the Bank of Japan may tweak its super-easy policy anytime soon are also making traders more willing to tolerate increased risk.

“Investors are scooping up some hybrid bonds in the secondary market as their appetite is recovering,” said Daisuke Bessho, head of fixed income sales department 1 at Mizuho Securities Co. Japanese bond spreads have also climbed over the past month to levels that have attracted buying by investors, he said. 

Spreads for yen corporate notes rose 16 basis points this year to as high as 53 basis points in August, the steepest level since December 2020, according to a Bloomberg index. But that’s still slower than the 26-basis-point increase in yield premiums for investment-grade Asian dollar notes so far in 2022.

Article content

Better Yields

Japan’s first hybrid bonds by a power company, Kyushu Electric Power Co.’s offering in 2020, illustrate the yield advantage of the notes. The deal included debt that’s callable in 2025 that is now yielding 0.81% to the call date, according to Bloomberg-compiled prices. That compares with a 0.31% yield on regular secured notes due in 2026 that were sold the next year.

Tohoku Electric, based in northeastern Japan, is planning the hybrid bond sale because it wants to get mid-to-long term funds to boost renewable energy-related investments while at the same time trying to strengthen its financial base, according to Shinji Abe, manager at the firm’s finance and accounting group.

Resource-scant Japan relies heavily on imported fuel to generate electricity, as much of the nation’s commercially available nuclear power plants are still idled following the 2011 Fukushima nuclear disaster. 

The weak yen and surging energy costs have made it expensive for companies to secure the fuel they need: as a result, Tohoku expects a 180 billion yen net loss for the fiscal year ending March 2023, while Kansai Electric is forecasting a 75 billion yen loss. Meanwhile, Chugoku Electric Power Co. last month announced it would raise funds via a transition-linked hybrid loan to help it reduce carbon emissions.

More power companies may sell hybrid bonds going forward as a way to secure funds without hurting their credit quality, said Toshiyasu Ohashi, chief credit analyst at Daiwa Securities Co.