[Click eStock] Korea Electric Power Bonds with Increased Interest Rate Appeal

Shinyoung Securities Report

[Asia Economy Reporter Minji Lee] Shin Securities analyzed on the 9th that the bonds issued by Korea Electric Power Corporation (KEPCO) have attractive interest rates and could be a suitable investment destination for investors aiming to receive long-term coupon interest.

In the second half of last year, KEPCO sharply increased its bond issuance volume. While the issuance volume of KEPCO bonds was in the early 1 trillion won range in the first half of last year, it exceeded 9 trillion won in the second half and surpassed 12 trillion won as of the end of last month. The net issuance volume exceeding the maturity scale expanded from 1 trillion won in the first half of last year to 7 trillion won in the second half, and currently stands at 10 trillion won. Compared to recent net issuance institutions of public and corporate bonds, KEPCO accounts for a significant portion with an overwhelming scale.

KEPCO increased its issuance volume due to its operating performance. This phenomenon occurred because the sharp rise in electricity production costs was not sufficiently passed on to electricity rates. Considering the high international raw material prices and constraints on rate increases, making performance improvement difficult, KEPCO's net bond issuance is expected to continue in the short term. In fact, KEPCO has increased net repayments when performance was good and increased net issuance when performance was poor. Researcher Kyungrok Lee of Shin Young Securities stated, “Although it is reported that funds will be partially secured through self-help plans such as asset sales, large-scale bond issuance is inevitable as long as huge losses continue.”

As a large volume of bonds is released into the market, issuance interest rates have been rising. The average market interest rate for KEPCO bonds, which was about 1.38% (based on a 3-year maturity) in May last year, has risen to around 3.8% currently. This is fundamentally due to the rise in the base interest rate and government bond yields, as well as the widening credit spread of public and corporate bonds. However, since the beginning of this year, both issuance volume and issuance interest rates have sharply increased due to the rapid rise in raw material prices such as oil and the growing burden on performance.

However, the interest rate attractiveness of KEPCO bonds is expected to be temporary. According to Article 16, Paragraph 3 of the Korea Electric Power Corporation Act, the amount of bond issuance cannot exceed twice the sum of the corporation's capital and reserves. At the end of last year, KEPCO's total capital was about 47 trillion won, and the current bond issuance amount is about 50 trillion won.

Researcher Lee said, “Although there is still a bond issuance limit remaining according to funding needs, it will be difficult to issue bonds at the current level from next year onward if total capital decreases due to the expected large losses this year. If raw material prices stabilize downward, constraints on rate increases are resolved, or nuclear power utilization rates rise, resulting in performance improvement, KEPCO's bond issuance volume will decrease,” he analyzed.

However, for investors who intend to hold the bonds until maturity to receive coupon interest, KEPCO bonds are an attractive investment. KEPCO bonds offer relatively high interest rates, and even if the Bank of Korea raises the base interest rate, the currently offered rates are considered high from a long-term perspective. Researcher Lee said, “Although market interest rates have risen significantly, considering that volatility will continue for a while, investors with short investment periods or those seeking bond trading profits should carefully consider the appropriate investment timing. However, for those aiming to receive coupon interest in the long term, it is worth considering investment.”

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