Snowball Effect... 1 Trillion Won in Corporate Bonds Just One Month After Financial Improvement

Issued 15.5 Trillion Won This Year Alone
Half of Last Year's Annual Issuance
Bond Issuance Limit Nears Year-End Cap
Plan to Increase Limit Through Legal Amendment

Korea Electric Power Corporation (KEPCO) has increased its newly issued corporate bonds by 1 trillion won just over a month after starting a high-intensity financial improvement last month. Although KEPCO is accelerating efforts to devise self-help measures to escape deficit management, evaluations suggest that it is insufficient to handle the increasing debt.

According to the energy industry on the 27th, the scale of newly issued corporate bonds by KEPCO from the beginning of this year to this month reached 15.5 trillion won. Corporate bonds, which were at the level of 14.5 trillion won at the end of last month, increased by 1 trillion won in just over a month. This is already a 49.1% increase, close to half of last year's annual issuance amount (10.43 trillion won), in just the first half of this year.

The reason KEPCO continues large-scale borrowing management by borrowing debt to cover debt is that it freezes electricity rates despite the sharp rise in power purchase costs, replacing management losses with corporate bonds. KEPCO's accumulated corporate bond scale currently stands at about 51.3 trillion won (on a separate basis).

The problem is that KEPCO's bond issuance limit is reaching its limit within the year. According to the Korea Electric Power Corporation Act, "The limit on bond issuance shall not exceed twice the sum of the corporation's capital and reserves." As of the end of last year, KEPCO's combined capital and reserves were about 45.9 trillion won, theoretically allowing the issuance of corporate bonds worth about 92 trillion won, twice that amount. However, since reserves decrease by the amount of net loss for the period, the bond issuance limit has shrunk by about 10 trillion won in just the first quarter of this year.

The reason the government plans to amend the Korea Electric Power Corporation Act within the year to expand the bond issuance limit is that it will be difficult to secure cash if bond issuance is suspended immediately. The industry expects that if KEPCO increases the bond issuance limit by at least twice the current level, it can minimize the burden from deficit management for the time being.

Even in this case, the problem remains that KEPCO's share in the domestic public and corporate bond market will rapidly increase. If KEPCO, a high-quality company, floods the market with high-interest bonds, it could become more difficult for companies with relatively lower credit ratings to raise funds. In fact, the coupon rate of KEPCO's most recently issued 5-year corporate bonds with a AAA credit rating is about 4.030% per annum, while the issuance rate of BBB+ to BBB- rated corporate bonds issued this month has risen to as high as 5.5% per annum.

KEPCO is undertaking a 6 trillion won financial structure improvement to reduce corporate bond issuance and escape deficit management. However, the funds secured so far by disposing of equity stakes (2 cases) and real estate (3 cases) amount to only about 130 billion won. KEPCO claims to have reduced 1.3 trillion won through budget deferral and expenditure cuts, but this is essentially an estimated reduction effect and is far from actual cash acquisition.

An energy industry official diagnosed, "For KEPCO's management normalization, it is necessary to first reduce chronic deficits through electricity rate increases and gradually reduce corporate bond issuance."

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