"Limitations of Debt Rollover"... KEPCO Turns to Bank Loans

[Image source=Yonhap News]

The fallout from the Legoland default crisis is spreading to Korea Electric Power Corporation's (KEPCO) operational fund pressures. Securing the 2 trillion won scale of borrowings and payments for power production to power generation companies due this month is already uncertain. This is the result of a paralysis in cash flow as fears grow that money lent in the bond market may not be repaid. KEPCO plans to actively utilize bank loans and overseas bond issuance as issuing corporate bonds becomes difficult, but there are concerns that the vicious cycle of KEPCO's cash crunch could worsen due to refinancing with high-interest loans.

According to the energy industry on the 7th, KEPCO sent a Request for Proposal (RFP) for selecting financial institutions for operational fund borrowing to major banks on the 4th. This is a preliminary step to review banks with favorable interest rates before taking out loans for operational fund procurement. KEPCO intends to secure funds worth 2 trillion won through bank loans by the end of the year. The loan interest rate is expected to be in the high 5% range, similar to KEPCO bonds. Some predict that with the possibility of further base rate hikes by the Bank of Korea, banks may offer minimum interest rates in the 6% range. KEPCO plans to notify the successful bidders individually once the bidding closes on the 11th.

KEPCO's sudden shift this month from corporate bonds to bank loans as a channel for operational funds is due to criticism that KEPCO bonds are disrupting the bond market. The bond market tightening, which has led to KEPCO corporate bonds failing to meet issuance targets, also underpins this judgment. Last month, KEPCO aimed to issue corporate bonds worth 1.2 trillion won in four rounds but only managed about half, 590 billion won. This large-scale failure to sell bonds is the first in three years.

Given the situation, KEPCO has begun considering additional overseas bond issuance. Previously, in June and last month, it issued overseas bonds totaling 1.6 billion dollars (approximately 2.26 trillion won) in two rounds of 800 million dollars each. The coupon rate for the 5.5-year bonds last month was 5.5%, raising the rate by 1.5 percentage points in four months. However, unlike corporate bonds, overseas bond issuance risks being blocked due to lowered external creditworthiness.

This is why KEPCO is preparing to issue 400 billion won worth of corporate bonds again this week instead of overseas bonds. It cannot stop issuing corporate bonds to secure operational funds immediately. According to the Korea Financial Investment Association, the 3-year KEPCO bond rate hit a record high of 5.825% on the 21st of last month but slightly dropped to 5.690% earlier this month. The industry fears that if KEPCO bond failures continue, interest rates will inevitably have to be offered in the 6% range soon. As KEPCO's borrowing management reaches its limit, the possibility of electricity rate hikes next year is also being raised. KEPCO raised electricity rates by 7.4 won per kWh last month, but the consensus operating loss for the fourth quarter of this year is estimated at 8.45 trillion won.

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