Tokyo Electric bond holders want BOJ to buy more
* BOJ buying of TEPCO bonds believed to have reached maximum
* TEPCO bond holders want BOJ to buy more, others see moral hazard
* TEPCO's 2-year spread notionally at 200-300 bps above JGBs
TOKYO, April 7 (Reuters) - Bond holders of Tokyo Electric Power Co are calling for the Bank of Japan to expand the scale of its outright corporate bond purchases for the troubled utility giant as credit conditions deteriorate after last month's earthquake.
The BOJ was believed to have bought 100 billion yen ($1.17 billion) worth of bonds on Wednesday in the company, known as TEPCO, as part of its asset-buying programme to support the economy.
But the purchase means it has reached the maximum it can hold in its portfolio for an individual company, corporate bond market sources said.
The BOJ does not disclose details of the results of its operations, but the central bank's suspected purchase of TEPCO bonds eased concerns over a possible default of the bonds.
Still, institutional investors such as pension funds and life insurers, who are key holders of TEPCO bonds, would be eager to remove their exposure to the country's top corporate bond issuer, which accounts for about 5 trillion yen or 8 percent of the 70 trillion yen Japanese corporate bond market.
"If the BOJ could increase the limit of its purchases for one issuer it could stabilise TEPCO's bond price as well as helping stabilise the corporate bond market as a whole," said Toshiyasu Ohashi, the head credit research at Daiwa Capital Markets.
After the March 11 earthquake the central bank quadrupled the overall limit on corporate bonds it can hold in its asset purchase programme to 2 trillion yen, but kept the maximum holding for a single company's bonds unchanged at 100 billion yen.
"There's expected to be a rise in demand to raise funds related to reconstruction after the quake. Considering this, the BOJ should ease its rules so it can buy more individual corporate bonds. That would help lower fund-raising costs for firms," a bond trader at a domestic financial institution.
But others say the BOJ should not increase its purchases just for one company as it could risk affecting the market mechanism and hurt its balance sheet.
"Basically, I feel the BOJ shouldn't change its scheme. If the BOJ decides to increase the limit, then it would also have to do so for other companies in danger of failing," said Masaru Hamasaki, a senior strategist at Toyota Asset Management.
"In principle, the market has to resolve this by itself. If a holder has to sell TEPCO bonds, then it has to lower the price until it can find a buyer. The BOJ's bailout is not necessarily good for the market," Hamasaki said.
The spread on TEPCO's bonds <0#9501=JFI> has sharply widened since the quake left it struggling to control radiation leaks and prevent further meltdowns in nuclear reactors at its Fukushima Daiichi plant 240 km (150 miles) north of Tokyo.
The spread on TEPCO's two-year bond was notionally assessed at about 200-300 basis points above that of the equivalent Japanese government bond, bond market sources said. It was about 7 to 8 bps before the quake.
TEPCO's five-year credit default swaps rose to 363 bps on Thursday from 337 bps the previous day.
($1 = 85.475 Japanese Yen) (Reporting by Hiroyasu Hoshi, Naoyuki Katayama and Chikafumi Hodo; Editing by Michael Watson)
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