[The Editors' Verdict] "Perpetual Bonds" Are Not the Solution to KEPCO's Problems

Korea Electric Power Corporation (KEPCO) is considering issuing hybrid capital securities (perpetual bonds) as part of its self-rescue plan. However, issuing perpetual bonds will have minimal effect on financial improvement and will clearly only increase KEPCO's cost burden. Although it is an easy way to slightly improve the financial structure, it cannot be considered a fundamental solution.

Let’s take a look at KEPCO’s financial situation. KEPCO recorded an operating loss of 5.8601 trillion won last year, followed by an operating loss of 7.7869 trillion won in the first quarter of this year alone. On a separate financial statement excluding power generation subsidiaries, the operating loss for the first quarter of this year reached 9.1624 trillion won. The net losses for last year and the first quarter of this year exceed 12 trillion won. Due to consecutive net losses, equity capital shrank by more than 13 trillion won in 15 months, from 53.3314 trillion won to 40.63 trillion won. As borrowings increased and liabilities grew, total liabilities rose by about 20 trillion won to 78.34 trillion won.

How much perpetual bonds must be issued to improve the financial structure of this massive public enterprise? About 1 trillion won would not help much. Even if 1 trillion won of perpetual bonds is recognized as capital to lower the debt ratio, it would only reduce it by 4 percentage points, from 262% to 258% as of the end of the first quarter. Moreover, it is not feasible to issue several trillion won worth of perpetual bonds all at once. Furthermore, slightly lowering the debt ratio on accounting books does not substantially benefit KEPCO’s financial situation. The debt ratio is merely an accounting figure.

Issuing perpetual bonds would actually increase KEPCO’s interest expense burden. Perpetual bonds generally have an issuance rate more than 1 percentage point higher than regular bonds (corporate bonds). Assuming the issuance of about 1 trillion won in perpetual bonds, interest expenses would increase by approximately 10 billion won annually. Additionally, if the call option is not exercised after 3 or 5 years, the step-up clause will cause the interest rate to rise significantly. To avoid increased interest burden, the call option must be exercised within the term to repay principal and interest.

In a situation where overall funding costs are rising due to big rate hikes (big steps) in the US and Korea, it is questionable whether it is necessary to issue high-interest perpetual bonds that lead to actual cash outflows in interest expenses. When Korea Gas Corporation issued perpetual bonds to improve its finances in the past, the Board of Audit and Inspection pointed out the increased interest expense burden, preventing the final issuance. Even if KDB Industrial Bank, KEPCO’s major shareholder, takes up a significant portion of the perpetual bonds, it is uncertain how much interest can be reduced. Even if the interest rate is lowered, it would be a burden for KDB to allocate large-scale funds to low-yield bonds.

In the second quarter, factors for KEPCO’s electricity rate hikes continue. According to the Korea Power Exchange, the electricity wholesale price (SMP) KEPCO pays to power producers last month rose 164.7% year-on-year to 202.11 won per kilowatt-hour (kWh) and continues to increase. Without fundamental problem resolution, a large-scale deficit structure will inevitably persist for some time. To solve KEPCO’s problems, it is necessary to take a straightforward approach rather than issuing perpetual bonds, which have minimal effect and only increase cost burden. Financial support to secure operating funds should be implemented, and a path should be opened to allow electricity rates to be adjusted realistically in response to large fuel cost burdens.

The summer, when electricity demand explodes, is just around the corner. Rather than temporary measures like issuing perpetual bonds with minimal effect, we hope that solutions addressing structural problems will be implemented swiftly. KEPCO’s deficit clock is ticking too fast to only engage in political debates blaming the Moon Jae-in administration’s nuclear phase-out policy for KEPCO’s problems.

Lim Jeong-su, Head of Capital Markets Department

This content was produced with the assistance of AI translation services.