Ratings agency Standard and Poor's cut its credit rating on Tokyo Electric Power <9501.T> to junk status on Monday, saying the utility's bank lenders were more likely to be forced to write off debt as part of a restructuring scheme to compensate victims of an ongoing nuclear crisis.
S&P said it had lowered the long-term credit rating of Tokyo Electric, one of the most active bond issuers in Japan, to B+ from BBB, while cutting the rating on the utility's secured bonds to BB+ from BBB.
The ratings agency said it viewed a default on the utility's 5 trillion yen ($62 billion) in corporate bonds as less likely than a restructuring of its bank debt.
Japan's government earlier this month agreed to set up a fund with taxpayers' money to help Tokyo Electric, known as Tepco, avoid insolvency and compensate victims of the radiation crisis at its Fukushima Daiichi nuclear plant, where reactor cooling systems were knocked out by the March 11 earthquake and tsunami.
But Chief Cabinet Secretary Yukio Edano has said the government scheme, which still needs parliamentary approval, would be unlikely to gain public support unless Tepco's banks agreed to waive some of the debt they are owed by the utility, a step they have resisted.
S&P said a restructuring of Tepco's bank debt would be a selective default, and it now regarded the probability of extraordinary Japanese government support for Tepco as high rather than very high, the phrase it had previously used.
Standard & Poor's now believes that some politicians think banks should share the burden in some form, which may fall into our definition of default, S&P said in a statement. We now think such a scenario is more likely than previously thought.
Tepco is Japan's largest corporate bond issuer and its shares are widely held by financial institutions.
Moody's Investors Service said on May 19 it may review the credit ratings of Tepco if Japan fails to pass laws to help the utility handle compensation payments related to its disabled nuclear plant.
Such a move would also see Moody's view on debt of Tepco, one of the most active bond issuers in Japan, shifting to junk status.
(Reporting by Chisa Fujioka; Editing by Michael Watson)