THE DISTILLERY: Fear and loathing

Origin Energy's $2.3 billion issue drew much favourable comment from our jotters this morning, the sound of the applause woke me this morning in time for this offering, actually. But the issue du jour, du week and du year so far is the terrible situation in Japan. The selling wave that started in Tokyo continued into European and US trading. The Fed ignored Japan as it sat pat on rates but injected a more upbeat tone into its post-meeting statement. Some papers seemed to run out of headlines that conveyed the situation calmly, having exhausted their stock of cliches earlier in the week. A couple of our scribblers struck the right note, though.
 
The Financial Times reported on the front page of its Asian edition that: "Japan is facing an increasingly uphill battle to avert a major nuclear disaster after a spate of new problems hit an earthquake-stricken nuclear plant north of Tokyo. Four days after a devastating earthquake and tsunami hit north-east Japan, damaging a nuclear plant in Fukushima, Tokyo Electric Power is facing problems at all six reactors at the facility. Tepco on Tuesday said the temperature at the Daiichi plant's reactors number five and six had risen above normal levels. Earlier, an explosion damaged a water tank under reactor number two's protective container vessel, escalating the crisis to a new level. That news sparked a sell-off of Japanese equities with the Nikkei 225 falling 10.6 per cent."
 
The Australian Financial Review reported: "Explosions and a fire at Japan's quake-hit nuclear plant have unleashed dangerous levels of radiation, sparking more panic-buying in supermarkets. Some Tokyo residents flee capital. Workers struggle to control Fukushima. 100,000 troops mobilised in search efforts." And the paper also reported that: "Worries over Gunns' large exposure to Japan and possible delays in closing asset sales had shareholders wipe more than $80 million from its market capitalisation over the past three days."
 
The Australian's Tim Boreham made a good point in the paper this morning: "There's a yawning disconnect between the local market's panicked reaction to Tokyo's sell-off yesterday and the likely ill-effects on our Japan-exposed stocks. But that's the market: ostensibly hard-headed but in reality as emotional as a newborn babe. With the selling likely to intensify as long as the Fukushima reactors belch radioactive substances, opportunities will emerge for steely nerved investors."
 
News Ltd tabloidist Terry McCrann belied the "Nuclear Nightmare" headline that screamed on the Herald Sun's website with these comments this morning: "Even the worst – China Syndrome-fantasy – case outcome, while devastating for both the Japanese economy and even more, ordinary Japanese, wouldn't bring the world to a shuddering stop. The more realistic worst case outcome, essentially the plant having to be entombed in concrete Chernobyl-style, while a serious environmental and economic event in Japan, wouldn't in itself be a significant blow to either the world economy or global financial markets. And of course the range of possible outcomes reduce from there. Clearly, if understandably, markets overreacted yesterday. They were led by – even more understandably – the fear and loathing on the Tokyo Exchange. And the very specific, very real, potential consequences for various Japanese companies."
 
The AFR also looked at the company at the centre of the nuclear crisis "The Tokyo Electric Power Company is not the sort of corporation that attracts much public attention around the world even though it sells about as much electricity in a year as the entire nation of Italy uses." Its shares lost around 49 per cent of their value on Monday and Tuesday and Moody's has it on credit watch for a possible downgrade.
 
The paper also wrote: "The Japan earthquake and subsequent nuclear crisis could hardly have come at a worse time for Australia's pure-play uranium producers, Paladin Energy and ERA."
 
The Australian's Matthew Stevens wrote a sensible column this morning  that ended: "The challenge for investors in the nuclear cycle is to assess how substantially Fukushima will change the risk-reward profile of that industry. And to make sensible judgments on that is impossible until this terrible and volatile situation is fully played out in Japan and then assessed by the global power industry. As it is with Fukushima, so it is in just about every other corner of the investment globe. And, as I say, until there is some semblance of certainty, fear will be the key."
 
And Michael Pascoe wrote on smh.com.au yesterday that in Japan "the shrinking workforce will be unable to fund the debt spiral while the ageing population becomes more expensive to care for. It is a demographic nightmare. And that, maybe, holds the seeds of possibly the only good thing to come out of the horror of March 11. Perhaps, confronted with the size of the immediate reconstruction task and its precarious finances, Tokyo might be forced to confront its unsustainable nature. The endemic pork barrelling, the roads to nowhere, the feather-bedded bureaucracy, the rorted agricultural electorates – they all have to go. There's a chance that the present crisis might help prevent the broader approaching one, but only a chance. Japan is different."
 
On The Australian's website yesterday John Durie took aim at Future Fund chairman David Murray and gave him both barrels: "David Murray is clearly getting worried about his re-appointment chances at Future Fund as evidenced by the public lobbying campaign starting now. His attempt to paint his re-appointment around independence from government policy ignores suggestions that opposition is also coming from his own board. Some members worry that Murray has adopted the Future Fund for his own profile purposes, and they would prefer a different style of chairman. The Future Fund board works for the fund, not "David Murray's Future Fund”. There are highly qualified fund management people ready to replace him, and former JPMorgan executive Brian Watson is an obvious candidate." Several very good points.
 
Fairfax's Liz Knight wondered about Origin's $2.3 billion issue yesterday on smh.com.au: "Origin chairman Kevin McCann appears to have turned a blind eye to the political turmoil taking place in the lead up to the NSW state election, fast-tracking a capital raising to pay for the NSW energy assets it officially purchased on March 1. The company's announcement yesterday of an accelerated tradeable offer. It looks to be a new twist on a renounceable issue – the effect of which is that all shareholders that hold stock on March 18 will be entitled to participate in a discounted issue or trade these rights. In other words, it will only be three days before this $2.3 billion issue will become irreversible – the rights will have been traded and the finance egg sufficiently scrambled. Origin does not want a Liberal government or anyone else to revoke the asset sale. The company likes the deal it did and the price it paid and wants the assets it believes it bought fair and square. "
 
This morning Knight remained on the same issue, writing that the $2.3 billion issue from Origin "will not stop any government from rescinding the sale contract, but it might influence the amount of compensation the government would be required to pay. The more likely outcome will be a Liberal government ditching any plans to reverse this transaction and setting its sights on undertaking the next round of energy privatisation using a different model – one that allows the full sale of gentrader assets, Macquarie and Delta Coast – rather than just selling supply agreements. There is little argument that using this full-sale model with increase the number of interested buyers and the overall price."
 
And The Australian's John Durie wrote this morning that: "Origin's $2.3 billion equity raising shows that big companies are still laying energy bets amid uncertain carbon policies, but their benefits are easily found. Grant King's empire is built on the foundation of a fully integrated business model that means he can manage wholesale energy market risk – and indeed government policy risk – with stable retail customers. The same applies to AGL and TruEnergy, with the latter showcasing the diversification benefits by diluting the Yallourn coal-fired generator's share of its portfolio from 77 per cent to 45 per cent."
 
Stephen Bartholomeusz wrote on Business Spectator: "The continuing quest for a fairer way to raise equity continues, with Origin Energy using yet another variation on a theme for the $2.3 billion capital raising it announced today. While there will still be a retail shortfall bookbuild at the end of the process, a month after the institutional shortfall has been dealt with, the innovation in the offer structure is that retail shareholders will be able to trade their entitlements on the ASX for 14 days after the institutional bookbuild is conducted on Thursday. Origin says it is the first time retail shareholders will receive upfront liquidity for their entitlements in an accelerated offer."
 
And Bryan Frith gave the Origin issue a round of applause in his column this morning in The Australian: "Origin Energy and its investment bank adviser Merrill Lynch appear to have finally come up with an equity raising structure that should please everybody – the issuer, underwriters and the shareholders, both institutional and retail. Importantly, the structure is equitable to both institutional and retail shareholders, a feature which has been missing to varying degrees from other capital rising methods."
 
The AFR reported that: "The talks between Foxtel and Liberty Global, the US-based controlling shareholder of Austar United Communications, over a potential $2 billion merger have hit a familiar hurdle: Telstra."
 
And finally, The Financial Times' Gideon Rachman on Europe's latest debt deal: "The deal reached over the weekend in Brussels to strengthen the bloc's €440 billion rescue fund for debt-afflicted nations is the latest rescue package. It will be overshadowed by the horrors in Libya and Japan. That may delay the sceptical reaction in the markets and buy Europe some time. But, have no doubt, the European debt crisis will return. That is because the fundamental European problem is now not economic – it is political. Euroscepticism is rising across the European Union, both in countries that have received bail-outs and in the countries that have funded them. That is sowing ill-feeling between nations and making it all but impossible for leaders to make necessary compromises. The German chancellor knows that anger about the EU and about immigration are also potent forces in her own country. The trouble is, to fend off the threat of political radicalisation in Germany, Merkel is demanding austerity policies in countries such as Greece that pose a long-term risk to their political stability. European leaders do not know whether to be more frightened of the bond markets or of their own voters."