‘Time Bomb’ KEPCO... Approaching 20 Trillion KRW in Corporate Bond Issuance This Year

KEPCO's Corporate Bond Issuance Exceeds 19.3 Trillion Won This Year
Corporate Bond Outstanding Balance Surpasses 55.5 Trillion Won
AAA-Rated High-Interest Bonds Flood Market, Absorbing Liquidity
Limitations of 'Roll-Over' Financing Using Debt for Operating Funds

Korea Electric Power Corporation Seoul Headquarters located in Jung-gu, Seoul. [Image source=Yonhap News]

[Asia Economy Sejong=Reporter Lee Jun-hyung] Korea Electric Power Corporation's (KEPCO) corporate bond issuance this year is expected to exceed 20 trillion won within this month. This is double the annual issuance amount of last year (approximately 10.43 trillion won). The increase in bond issuance is a result of growing deficits caused by a ‘negative margin’ structure where electricity is sold at a loss. Since the current law limits the amount of corporate bonds KEPCO can issue, the ‘rolling over’ of operating funds through debt is also expected to soon reach its limit.

According to the energy industry on the 1st, KEPCO has issued corporate bonds worth 19.32 trillion won from the beginning of this year until the end of August. This means KEPCO has been issuing about 2.415 trillion won in corporate bonds every month so far this year. If this trend continues, KEPCO’s new corporate bond issuance by the end of this year is estimated to be around 30 trillion won.

The forecast by the National Assembly Budget Office has already been surpassed. In the ‘2021 Fiscal Year Public Institution Settlement’ report published on the 16th of this month, the National Assembly Budget Office analyzed that KEPCO would issue 18.1 trillion won in corporate bonds this year. However, KEPCO has already issued 1.22 trillion won more in corporate bonds than the National Assembly Budget Office’s forecast. This indicates that KEPCO’s recent corporate bond issuance trend is unusual.

Distortion in the Bond Market... ‘Negative Margin’ is the Cause

In the bond market, there are concerns that KEPCO is adding a negative factor of ‘oversupply’ to the corporate bond market, which has been shrinking due to interest rate hikes and recession fears. KEPCO is flooding the market with AAA-rated high-interest corporate bonds backed by government guarantees, absorbing liquidity in the bond market. In fact, KEPCO’s corporate bonds accounted for 38% of the total domestic corporate bond issuance in the first half of this year.

KEPCO states that it has no choice but to increase corporate bond issuance because it is selling electricity at a loss. The System Marginal Price (SMP), which is the price KEPCO pays to power producers for electricity, was 169.3 won per kWh in the first half of this year, more than double the 78 won in the same period last year. On the other hand, the electricity sales price, which KEPCO charges households and factories, increased only from 104.9 won to 110.4 won per kWh during the same period, a rise of 5.5 won. This entrenched negative margin structure has caused deficits to balloon. KEPCO posted a deficit of 14.3033 trillion won in the first half of this year alone.

‘Rolling Over’ Also Reaches Its Limit... Government Pushes for Legal Amendments

The problem is that there is little room for performance improvement in the second half of this year. This is because the government is not significantly raising electricity rates to stabilize prices. KEPCO’s fuel cost burden increased by 14.8 won and 33.8 won per kWh in the first and second quarters, respectively, due to soaring international oil and energy prices. However, the fuel cost adjustment rate, which is adjusted quarterly based on fuel cost fluctuations, was frozen at 0 won for both the first and second quarters. The fuel cost burden increased by 33.6 won per kWh in the third quarter, but the fuel cost adjustment rate increase was limited to 5 won.

The ‘rolling over’ of operating funds through corporate bonds is also reaching its limit. According to the Korea Electric Power Corporation Act, KEPCO’s corporate bond issuance cannot exceed twice the sum of its capital and reserves (approximately 45.9 trillion won). Although KEPCO’s outstanding corporate bonds stood at 55.565 trillion won as of the 31st of last month, it is necessary to consider that reserves decrease by the amount of net loss. If KEPCO posts a deficit of 30 trillion won this year, it is highly likely that the outstanding corporate bonds will exceed the limit starting from the first half of next year.

Accordingly, the government is pushing to increase the limit on KEPCO’s corporate bond issuance. This is driven by the urgency to prevent the worst-case scenario of KEPCO declaring default due to being unable to issue corporate bonds. A Ministry of Trade, Industry and Energy official said, "The bill must be passed by the National Assembly by early next year at the latest," adding, "It is highly likely to be proposed through a member’s bill due to timing."

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