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Inside Tepco's bailout: Japan Inc saves its own

Source : REUTERS
Last Updated: Sun, May 22, 2011 02:50 hrs
Inside Tepco's bailout: Japan Inc saves its own

In a choreographed act of contrition, Masataka Shimizu, the president of Tokyo Electric Power, bowed deeply and resigned to take responsibility for the worst nuclear disaster since Chernobyl.

From the outside, the news conference on Friday appeared to follow the familiar script for a Japanese corporate shaming. But behind the scenes, it also represented the successful culmination of a period of intensive deal-making by Tokyo Electric, its powerful allies in Japan's bureaucracy and its main bank.

Those closed-door talks began just three weeks after the March 11 earthquake and concluded with an extraordinary deal that guarantees the embattled utility's solvency, people involved in the talks said.

Tokyo Electric on Friday announced a $15 billion loss for the fiscal year that ended in March with three of its reactors at the Fukushima Daiichi nuclear plant still smoldering from a meltdown and a fourth full of dangerous uranium fuel rods at risk of collapse.

The loss was the largest ever reported by a Japanese company outside the banking sector and reflected the first payment toward a clean-up bill seen as potentially six times bigger than the BP's payout after the disastrous 2010 Gulf of Mexico oil spill.

But the outcome was still far better than the alternative Tokyo Electric executives had most feared.

Disaster timeline http://link.reuters.com/ceg69r

Compensation plan http://link.reuters.com/myv29r

The company, which once ranked as the world's largest private utility, was able to report that loss because it had won a pledge of government support that relieved the concern of Chairman Tsunehisa Katsumata about how auditors would view its Fukushima liability, according to the people involved in the preparations.

As importantly, Tokyo Electric and its main bank, Sumitomo Mitsui Financial Group, had succeeded in selling a compensation plan for the Fukushima nuclear accident that gave bondholders and creditor banks a shot at a free ride while avoiding a more wrenching restructuring of the utility, the sources say.

Shimizu, 66, announced his resignation near the darkened command center on the second floor of Tokyo Electric's headquarters where he had disappeared in the second week of the crisis after the March 11 earthquake.

After being briefly hospitalized for exhaustion after the disaster and widely criticized for his lack of leadership, Shimizu had come back for a round of ritual apologies for Fukushima evacuees and the resignation.

"We want to sincerely apologise for our nuclear reactors in Fukushima causing so much anxiety, worry and trouble to society," the outgoing president said.

Tokyo Electric shareholders, including its banks, have lost a combined $36 billion since March 11, but the deal struck by the utility spared them a complete wipeout in bankruptcy.

In a series of interviews, a dozen people involved in the discussions that led to the plan to compensate Fukushima victims announced last week by the government of Prime Minister Naoto Kan, described how the utility widely known as Tepco won a government declaration that it was too big to fail at a time when its survival had been in question.

Their account provides a rare look into a policy decision by the Japanese government in the midst of the nation's most dire peacetime crisis and shows how the consensus hardened around an old-school Japanese approach that appeals to public burden sharing at the same time that it protects powerful financial interests.

In the process, Wall Street banks that had proposed a tougher-line restructuring like the bankruptcy of General Motors by the Obama administration were shut out.

So too were those inside the Japanese government who wanted to see a market-driven restructuring of Tepco or an outright nationalization, according to the people involved in the discussions who asked not to be named.

Part of the calculation was a view that political opponents of the bailout would remain too fragmented to block its adoption in parliament and the Japanese media would not aggressively question a plan that promised to speed payouts to victims of the disaster, one of the principal architects of the plan said.

In the end, Kan - who had exploded in anger at Tepco officials in the first days of the nuclear crisis and promised a more open approach to containing it - was persuaded to support a plan to save the utility that had come together entirely behind closed doors.

Critics of the plan say it leaves the Japanese government on the hook for a higher share of the costs of the Fukushima clean-up, threatens to dampen innovation and new investment by Japan's utilities and opens the door to both higher taxes and higher electricity rates, issues likely to be raked over in the coming parliamentary debate on the plan.

"Everyone needs to be comfortable about leaving public money at risk and essentially letting investors and lenders have a free ride, especially when they were the owners of the enterprise on whose watch catastrophe occurred," said Peter Kaufman, a restructuring expert and president of the New York-based Gordian Group.

THE DISSIDENT

When Shigeaki Koga sat down to write his plan on how to pay the massive clean-up bill for Fukushima, he knew he was also writing what could become a career-ending suicide note.

After more than three decades at the powerful Ministry of Economy, Trade and Industry, Koga, 55, was prepared to do something he knew his superiors would view as unforgivable at a government agency seen as an icon of both Japan's post-war success and its deep-seated resistance to change.

In an 18-page, single-spaced memo, Koga picked apart the logic of the backroom deal his ministry was shepherding to save Tokyo Electric Power from bankruptcy because of the mounting liability from the crisis at the Fukushima Daiichi nuclear complex.

By that point, there was little sign that Tokyo Electric was having much success in bringing Fukushima under control. Radiation levels in nearby seawater were spiking and many outside experts had come to a conclusion that Japan's largest utility would only acknowledge six weeks later: three of the Fukushima reactors had gone into a meltdown after being struck by the 9.0 magnitude earthquake and 14-meter tsunami.

The accident had snarled and slowed Japan's response to the damage along its northeastern coast from the disaster. About 25,000 people were missing or dead from the earthquake and tsunami. With nearby evacuation shelters already packed, another 80,000 residents near Fukushima would be driven from their homes because of the threat of radiation.

Farmers were ordered to destroy an early harvest of crops ranging from cabbage to tea as radiation moved through the food chain. Abandoned chickens died in their coops, and feral cows roamed the streets of one town in the "no-go" evacuation zone until they could be put down by agriculture officials in protective white suits.

With no sign of an end to the crisis in sight, a group of Japanese officials in economic policy Tokyo went to work on a pressing question: Who would pay for this?

Estimates for the cost of the compensation to be paid by displaced residents and disrupted business ranged as high as $130 billion in an extended crisis, according to one calculation by Bank of America-Merrill Lynch.

By comparison, BP earmarked just $20 billion for its oil-spill clean-up fund run by an overseer appointed by the Obama administration.

Koga, who began studying the compensation question on his own, had enjoyed a career typical of senior METI officials until that point. A graduate of Tokyo University with a degree from its law department, he had joined the agency in 1980. That marked the high-water mark of the ministry's reputation and came just as an American researcher Chalmers Johnson, was finishing an influential book that would credit the ministry with a central role in engineering Japan's "economic miracle" that began in the 1950s.

As a fast-track prospect, Koga had been dispatched to South Africa, sent to work on U.S. trade talks and dispatched to the OECD in Paris before ending up back in Tokyo, where in 2003, he helped create new agency set up to speed the restructuring of "zombie" Japanese companies like retailer Daiei and cosmetics maker Kanebo.

Koga had seen that tough-love restructuring worked first-hand and saw no reason it should not be applied to Tepco. In fact, he worried that leaving Tepco under a decade of government oversight would deprive it of the funds and dynamism it would need.

Instead, shareholders and creditors should be first in line to sacrifice and Japan's largest utility should be put through bankruptcy, he argued.

Then, he said, the utility's senior executives should be fired, salaries and pensions should be slashed and its Tokyo headquarters -- just a short walk from the ministry that had long protected it -- should be sold.

At that point, Tepco should relocate to Fukushima "since the first priority should be payments to the victims of the nuclear crisis," Koga said. A failure to push that kind of restructuring would mean that taxpayers would end up paying as much as $60 billion more in clean-up costs, he warned in an April 5 memo that began to circulate among politicians over the next week and prompted a warning from his superiors at the ministry.

By email and in person, they asked him to stop. One senior official told him that it was "hard to watch" him behave in this way. He was accused him of shameless self-promotion. Others outside the ministry offered support.

Looking back, Koga knew he was fighting a rear-guard action against long odds. Tokyo Electric and its allies already had their bailout plan in the works, he had learned.

"It appeared to me that Tokyo Electric and the banks were exerting strong influence and that the scheme was going in the wrong direction," he told Reuters. "I thought I should relay all this to the public and get people to correctly understand the issues. That would make it easier for the government to make the right decisions, even if there was a lot of undue pressure to do otherwise."

THE DARK ROOM

By early April, the Japanese government's "team Tepco" was already coming together in the darkened corner on the second-floor of a building attached to METI, according to participants.

Most lights in the building had been turned off to save electricity and set an example in conservation because of the loss of the Fukushima reactors. Only one elevator was left in service and the only light in hallway came from a vending machine heavy on caffeinated beverages like canned coffee and energy drinks.

As a 40-member team of officials met to consider how to pay for the economic damage for the Fukushima disaster, the Nuclear and Industrial Safety Agency was holding twice-a-day briefings for reporters just upstairs on steps being taken to bring the reactors under control.

Although the Tepco working group included representatives of Japan's finance and agricultural ministries, it was understood that the show would be run by the senior METI official, Shinsuke Kitagawa, a veteran of the ministry's influential energy bureau.

In the buttoned-down, elitist culture of METI, Kitagawa represented something of an outlier. A graduate of Keio University rather than Tokyo University, his career included a long-shot effort in 2007 to convince Gulf States including Abu Dhabi that they should prepare for "post-oil" future by investing heavily in Japanese solar and oil recovery technology.

For the emergency Tepco project, Kitagawa had a clear mandate. The starting point was that Tepco would be spared bankruptcy because it could jeopardize its ability to proceed with repairs to its reactors and make payouts to victims while demoralizing its workers.

At that point, Tepco's main bank, SMBC, stepped in with a proposal that crystallized the consensus and became the outline for the government's plan, people in the discussions said.

As a regional monopoly representing a third of Japan's electricity demand and its most populous area, Tepco had long enjoyed the ability to spend money on everything from steel, to fleets of vehicles to TV commercials without haggling on price. That made it one the most prized customers for a range of industries, analysts say, including banking.

The former Mitsui bank had ties to Tepco going back to at least the fast-growth period of 1950s defined by shared capital and a history of mutual reliance in hard times.

By 1998, the Mitsui bank had merged to become Sakura Bank and was facing a growing bad loan problem. As part of the rescue, Tepco and other Mitsui-affiliated companies agreed to buy shares to help shore up the bank's capital.

By late March, the bank, Japan's third-largest lender after a merger with Sumitomo, was determined to return the favor at a time of crisis for Tepco by leading a syndicate for a $25-billion loan that looked like the world's riskiest deal on paper.

With Tepco's stock plunging and its credit rating on the cusp of junk status, Masayuki Oku, chairman of Sumitomo Mitsui Financial Group, met with METI Vice Minister Kazuo Matsunaga, in late March, Oku.

"It's true we exchanged opinions," said Oku, who is also chairman of the Japanese bankers association.

The meeting itself was seen as a way for the ministry to signal that it would not push for a hard-landing for Tepco, clearing the way for SMBC and other banks to offer new loans without the threat of imminent bankruptcy.

"I didn't want to believe that this was happening," said METI's Koga, who said he was spurred to write his dissent in part because of the rumor that his agency's most senior official had offered a tacit guarantee to new bank loans. "Why would the banks ignore risk like this?"

In the end, the $25-billion loan deal for Tepco, which included Mitsubishi UFJ, Sumitomo Mitsui Financial Group Inc and Mizuho Financial Group Inc, was announced on April 11.

THE ROAD NOT TAKEN

Around the same time, Nobuaki Kurumatani, a veteran Mitsui banker who had shot up the ranks at SMBC, sat down with the Kitagawa-led team studying Tepco with a short proposal that became the core of the plan approved by Kan's government a month later, documents show.

The SMBC plan proposed creating a nuclear compensation agency that other regional utilities would pay into much like banks paying deposit insurance. Banks, including SMBC, would make loans to the agency with a government guarantee, a source of new business for the lenders.

At the same time, the Kurumatani proposal capped the amount of compensation that Tepco would be forced to pay to roughly $8 billion over 10 years, a fraction of the projected total cost.

Everything in the plan won the endorsement of team Tepco -- except the way it capped Tepco's payouts, according to documents and statements by officials. That proved contentious.

A number of Wall Street banks pitched for an alternative to the bailout, including proposals that would have split off a shell company to handle Tepco's unresolved liabilities, much as the U.S. government did with GM, the sources said.

But Kurumatani put the word out that proposals from the non-Japanese banks were not welcome. There would be no investment banking fees. The message from SMBC: If you are bringing a proposal to restructure Tepco, you might as well turn around and go home.

Kurumatani and a pair of other colleagues quietly visited lawmakers from the ruling Democratic Party to lobby for the plan, according to a legislative aide. It was clear that the plan could not win support in the face of growing public anger without an open-ended commitment to compensation. ("They're like ninja," the aide said of the SMBC bankers. "They come to visit, but they don't leave footprints.")

Yukio Edano, the government's chief cabinet secretary, had become the face of the Kan government for millions of Japanese voters because of his regular, televised briefings on the disaster response.

Always wearing the blue work jacket that ministers donned during the early days of the crisis, Edano had won plaudits for his unflappable cool and his dedication to the job. At one point, he slept in his office for four straight nights.

Edano had also emerged as a sharp critic of Tepco, blasting its disclosure policy and criticizing executives for not understanding "the social position in which they now find themselves."

But an open-ended commitment to pay compensation was unacceptable to Tepco Chairman Katsumata, who had become the acting chief executive after Shimizu's collapse and helped steady the utility's headquarters leadership team.

"There is no way that our auditors are going to approve a sky's-the-limit compensation plan," he told reporters outside his home earlier this month.

Tepco was in a corner. A poll showed 74 percent of Japanese voters disapproved of its handling of the nuclear crisis.

But despite its weakened political pull, the utility still had another card to play. A 1961 law that established the legal framework for Japan's nuclear industry also provided that power plant operators would not be liable "when the damage is caused by an extraordinarily grave natural disaster."

If the government pushed a hard-line, Tepco could take its case to the courts. "We're confident that we would win, even if it meant going all the way to the highest appeal," one company executive involved in the discussions said.

In the end, the Kitagawa team found a compromise that gave both sides some of what they wanted and broke a logjam that had delayed the announcement of the plan by over a week.

The compensation to be paid out would be unlimited, but that was made irrelevant by a new phrase slipped into the government's plan as announced on March 13: "nuclear plant operators will not be made insolvent."

A government-directed bankruptcy for Tepco had been taken off the table.

CREATING A ZOMBIE

In the days after the Fukushima compensation plan was announced, Edano and business leaders continued to spar over what it meant for Tepco's creditors. That risk still loomed large for major banks.

SMBC had an estimated $11 billion in exposure to Tepco after the April lending round, according to CreditSights. The analysis service put the total for Mizuho Corp. at the equivalent of $8.5 billion and $5.8 billion for Bank of Tokyo-Mitsubishi.

On the same day that the Tepco plan was announced, Edano said that the government would have trouble "gaining public understanding" unless SMBC and other banks walked away from some of what they were owed from pre-quake loans to Tepco.

Japanese bankers and business leaders united in denouncing the suggestion.

Mitsubishi UFJ Financial Group President Katsunori Nagayasu said he found the call by Edano "sudden and strange." Japan Airlines Chief Executive Kazuo Inamori, brought in as part of that airline's restructuring in bankruptcy, said Edano was asking for something extraordinary outside bankruptcy, a step it had rejected.

"A debt waiver is possible when the company has failed and has been put through bankruptcy proceedings. I'm no expert but seeking a debt waiver for a company that hasn't failed might be a problem," said Inamori, who is also the founder of Kyocera.

But even with that debate still simmering, the chance for a wholesale restructuring of Tepco had passed, many critics had concluded. Tepco said on Friday it would sell assets worth about $7 billion, but that fell short of the more sweeping change some had urged.

"My deepest wish is to see Tepco put through a bankruptcy," said Akira Tokuhiro, a former Japanese nuclear researcher who believes it will take a restructuring on that order to shore up the utility's attention to safety. "But it looks like that wish is going to end as a wish."

Others worry that a decade of government oversight will leave Tepco as another Japanese corporate "zombie," unable to make new investments and drive innovation in areas like "smart grid" technology that promise improved efficiency and better support for electric vehicles.

"This leaves Tokyo Electric neither dead or alive," said Tatsunari Iida, director of the non-profit Institute for Sustainable Energy Policies. "They would have been better off going through bankruptcy."

Meanwhile, METI's Koga, who had argued unsuccessfully for just that option said he was prepared to be stripped of work and responsibility at the ministry after his dissent.

"They can't fire me for expressing my opinion, but it's going to be a very cold atmosphere," he said. "If it goes on like that, I may have to consider my options."

(Additional reporting by Nathan layne, Linda Sieg, Yoshifumi Takemoto, Osamu Tsukimori, Noriyuki Hirata, Kentaro Hamada and Kevin Krolicki; writing by Kevin Krolicki)

(Editing by Bill Tarrant)




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