TOKYO, May 16 (Reuters) - Moody's Investors Service cut its credit rating on Tokyo Electric Power to one notch above junk status, saying damage at its crippled nuclear plant was worse than previously thought and citing uncertainty over its burden to compensate victims.
Moody's said the ratings were kept on review for further possible downgrades.
The downgrade of Tokyo Electric's (Tepco) long-term issuer rating to "Baa3" from "Baa1" followed the government's announcement on Friday of a plan to help the utility handle compensation while remaining in operation and listed on the stock exchange.
The scheme will be funded with taxpayer money as well as contributions from other nuclear plant operators, but it places no limit on Tepco's liabilities for compensation, a factor likely to weigh on its finances for many years.
"While spreading payments out over many years could enable Tepco to remain financially viable, a substantial drain on cash flow for a prolonged period would, in Moody's view, reduce the company's financial flexibility and diminish its capacity to pay other obligations," Moody's said in a statement.
Ratings agency Standard and Poor's also cited the lack of a ceiling on Tepco's potential burden when it cut its rating on the utility to BBB from BBB+ on Friday after the scheme was announced.
Engineers are still working to bring reactors under control at Tepco's Fukushima Daiichi nuclear plant north of Tokyo two months after Japan's massive earthquake and tsunami.
Moody's said recent developments indicated damage was more serious than previously thought, raising the risk of escalating expenses and damages that would have to be compensated.
The ratings agency also cited comments by Chief Cabinet Secretary Yukio Edano on Friday suggesting that banks may be asked to forgive loans made to Tepco before the March 11 disaster.
"In addition, as part of the solution, there is the risk that creditors will be asked to take haircuts in respect of their lending. Such an outcome would, in Moody's view, represent a default by Tepco."
The ratings agency cut the utility's senior secured rating by one notch to "Baa2", which keeps it one notch above the long-term issuer rating.
Moody's said this reflected its view that "bond holders may be protected better than other creditors -- in this case, mainly the banks -- during the process to finalise the support scheme." (Reporting by Nathan Layne; Editing by Edmund Klamann)