Kepco increases short-term bond issuance amid severe losses

Korea Electric Power Corp. headquarters in Naju, South Jeolla Province, South Korea [Photo by Yonhap]

Korea Electric Power Corp. (Kepco), which has been grappling with significant losses, is ramping upthe issuance of short-term bonds in response to criticisms that state utility company has been absorbing a chunk of demand in the local corporate bond market through its long-term government-backed bonds.

According to industry sources on Monday, net issuance of Kepco bonds for this year has exceeded 10.35 trillion won ($7.86 billion) as of May 18, surpassing the 10 trillion won mark. However, the monthly net issuance of Kepco bonds has been steadily declining.

In January, it stood at 3.2 trillion won, but fell to 2.7 trillion won in February, 2.1 trillion won in March and 1.5 trillion won in April. In contrast, the net issuance of short-term bonds, such as commercial papers (CP) and electronic short-term bonds, has notably increased as Kepco bonds have declined.

The net issuance of CP was 750 billion won in January, gradually decreasing to 100 billion won in March. However, last month, the net issuance increased to 250 billion won, and this month, it has already surpassed 300 billion won.

As for electronic short-term bonds, during the months of January to March, the redemption of existing bonds exceeded new issuances. However, last month, net issuance of electronic short-term bonds exceeded 1 trillion won. Even in May, the net issuance of electronic short-term bonds is close to 500 billion won.

The trend of increasing bond issuance by Kepco is expected to continue for the time being. The recent government announcement of an electricity rate hike of 8 won per kilowatt-hour (kWh) will not provide significant relief to Kepco’s financial difficulties.

The government had estimated the necessary electricity rate increase for this year at 51.6 won per kWh in its plan to stabilize the company’s finances, which was submitted to the National Assembly at the end of last year. However, the actual rate increase during the first quarter and the recent announcement falls far short at only 21.1 won per kWh.

As concerns grow over a bias in the bond market where the increasing issuance of high-rated Kepco bonds absorbs demand that would otherwise go to general corporate bonds, Kepco has reduced the issuance of its bonds and instead increased the issuance of short-term debt.

Analysts predict that Kepco’s bond issuance will gradually decline in the second half of the year.