KEPCO sells $800 mn bonds as debt together with loss snowballs

[Photo by MK DB]

Korea Electric Power Corporation (KEPCO) facing astronomical losses this year has upped debt issues despite concerns for its financial integrity.

The state utility company recently held a book building session to sell $800 million worth of dollar bonds - $500 million in three-year bonds and $300 million in five-year bonds, according to industry sources on Thursday. It received a decent response from investors, attracting $4.1 billion for three-year bonds and $3 billion for five-year bonds, or $7.1 billion in total to record 8.9-to-1 competition.

The substantial demand for its new dollar-denominated issues comes from investors' confidence in the government backing, said Yoo Seung-woo, analyst at DB Financial Investment.

Standard & Poor's, an international credit rating agency, in May revised down KEPCO’s stand-alone credit profile to non-investment grade of BB+ from BBB-. However, it maintained its AA long-term issuer credit rating on the company with expectation for the Korean government’s support.

KEPCO has been steadily expanding debt issues amid mounting losses. It issued debts worth 6.9 trillion won ($5.5 billion) in 2018, 7.5 trillion won in 2019, 3.5 trillion won in 2020, and 10.4 trillion won in 2021. It has issued 12 trillion won worth of debts up to May this year.

The bond issues are mostly to cover operating loss, which amounted to 7.8 trillion won already in the first quarter overwhelm 5.9 trillion won annual operating loss in 2021. Analysts estimate KEPCO’s operating loss for this year at 23 trillion won.

KEPCO is planning self-rescue measures including asset sale but it is inevitable for the company to continue issuing debts as losses build up, observed Lee Kyung-rok, analyst at Shinyoung Securities.

Some think it would be realistic for the government to raise the annual ceiling for KEPCO’s debt issues.

Under the local law, KEPCO’s bond issue cannot exceed twice the combined amount of equity capital and reserve fund.

The ceiling is low compared to other public companies in Korea, said Yoo of DB Financial Investment, and suggested raising the cap to four to five times the equity capital and reserve fund amount like Korea Gas Corp. and Korea Land & Housing Corp.

Other argue it is more important for KEPCO to manage its earnings than going on increasing debt.

“It is meaningless to raise the cap on bond issue if total equity falls sharply from accumulating losses,” pointed out Lee of Shinyoung Securities.

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