Doosan Enerbility sells Bobcat stake as it faces challenges in bond market

[Courtesy of Doosan Enerbility]

South Korea’s power plant builder Doosan Enerbility Co.’s recent sale of a 5 percent stake in Doosan Bobcat Inc., its construction equipment unit, is raising concerns that the corporate bond market is losing its function as the tilt toward top-rated government bonds, such as those issued by state utility Korea Electric Power Corp. (KEPCO), have becomes more pronounced.

On June 21, Doosan Enerbility sold a 5 percent stake, or 5 million shares, in Doosan Bobcat for 276 billion won ($212.3 million) in after-hours trading before the local stock exchange opened on the day, resulting in its ownership in Doosan Bobcat declining to 46 percent from 51 percent. The company said that the sale was made to fund new growth businesses, such as small modular reactors (SMRs) and the production and development of hydrogen turbines for next-generation power generation.

However, as the proceeds is relatively small to fund future investments, it is raising questions about the stake sale. Market insiders observed that the sale reflected the difficulties Doosan Enerbility is facing in raising funds. Currently, the company is rated BBB, which is the highest rating for non-investment-grade bonds. Although the power plant builder’s corporate bonds yield high profit, they are considered risky investments.

In the current bond market, it is not easy for companies with non-investment-grade credit ratings like Doosan Enerbility to raise funds as KEPCO, which posted record losses, has been issuing a series of bonds to cover fuel and power purchases, absorbing funds from the market. Currently, the annual yields on KEPCO bonds with two-year and three-year maturity are around 4 percent, and they are rated AAA, the same as government bonds.

The last time Doosan Enerbility issued corporate bonds was in September last year. At the time, the company issued 80 billion won worth of bonds at an annual rate of 6.5 percent.

The current market disruption caused by the KEPCO bonds is not unique to Doosan Enerbility but is affecting corporate bonds in general.

Doosan Enerbility posted a net loss of 460.3 billion won last year as its core nuclear power business shrank significantly due to the previous Moon Jae-in administration‘s nuclear phase-out policy. Financing from banks is also challenging.

Doosan Enerbility has been raising funds by using its stake in Doosan Bobcat as collateral. At the end of the first quarter, the company borrowed 1.4 trillion won from local banks, including KDB Industrial Bank and Woori Bank, using Doosan Bobcat shares as collateral. Doosan Enerbility graduated from creditor management last year. As a result, it was forced to sell a 5 percent stake in its valuable subsidiary, Doosan Bobcat, in order to secure cash of less than 300 billion won.

However, there are growing expectations for an improvement in its financial structure as the power plant builder has recently received more than 700 billion won in advance payments from the Shin Hanul nuclear power plant project and the combined cycle power plant project in Kazakhstan.

It is known that foreign institutions took 80 percent of the shares in the Doosan Bobcat stake block deal. An official from Doosan Enerbility explained that the company decided to sell the stake in Doosan Bobcat to utilize internal resources in raising investment funds.