Abolition of general collateral in March 2013
The abolition of general collateral for electric power companies (formerly known as general electric utilities) is finally approaching in March 2013.
General collateral is when the entire assets held by the electric power company, the issuer, are used as collateral for the electric power bonds issued by the electric power company.
This system grants de facto priority (precedent) to bondholders in the recovery of funds, which is thought to have suppressed the yield on electric power bonds to a certain extent.
What will happen to the ratings?
This system will be abolished in March. The immediate key point is to what extent the rating rankings of electric power companies from April onwards will be affected.
It is clear that the abolition of general collateral is a downside event for ratings. However, the degree of impact will vary from company to company.
As symbolized by the equity financing implemented by Kansai Electric Power in November, electric power companies have already begun to diversify their fundraising methods.
Objectively speaking, there will be a mixture of companies for which such efforts will be successful and those for which they will not necessarily be successful.
Kansai Electric Power and Kyushu Electric Power, which are making progress in restarting their nuclear power plants, will not have any major problems raising funds, but for companies struggling with the burden of nuclear safety investments and the implementation of investment and repair plans in their business plans under the wheeling tariff revenue cap system, the abolition of general collateral could have a strong impact.
The big question will be whether they can maintain investment grade (triple B) or not.
It seems that there are already companies where the risk of not being investment grade is becoming apparent.
Rising fundraising costs may lead to higher electricity rates.
In addition to rising fundraising costs, some companies are considering raising electricity rates as a way to recover cash.
At a time when fossil fuel prices are relatively stable, such actions would certainly result in a loss of market share.
We have entered a phase where disparities in creditworthiness directly affect electricity rates and, ultimately, market share.