KEPCO Bonds Hit Hard by U.S. Treasury Yields... Is a Domino Shock Looming in the Bond Market?

Concerns Over AA and BBB-Rated Corporate Bonds,
Specialized Credit Finance Bonds Also at Risk
KEPCO Faces Growing Interest Expense Burden

The immediate trigger for the rise in Korea Electric Power Corporation (KEPCO) bond yields is the sharp increase in long-term interest rates originating from the United States. As concerns over rising international oil prices grow due to the escalation of war in the Middle East, expectations for a rate cut by the U.S. Federal Reserve have quickly diminished.

On May 19 (local time), the yield on the 10-year U.S. Treasury note climbed to 4.687%, the highest level since January last year. The yield on the 30-year Treasury note also rose intraday to 5.198%, marking the highest level in about 19 years since July 2007. Long-term interest rates in other major economies, including Japan and the United Kingdom, have also reached multi-decade highs, signaling a general downturn in global bond markets. The domestic market has also been hit hard. The yield on the 10-year Korean Treasury bond surged from 3.923% on April 30 to 4.239% the previous day, the highest since November 2023. As yields on government bonds rise, they serve as a benchmark, pushing up rates for special bonds and corporate bonds overall; KEPCO bonds are no exception to this trend.

Concerns That the Entire Corporate Bond Market Will Suffer

KEPCO issued 4.8 trillion won worth of new long-term won-denominated bonds just between January and April this year. The issuing rate jumped sharply from 3.181% in January to 3.73% in April. The market anticipates that issuance volumes could further increase in the second half of the year, as investment in the power grid and refinancing demand overlap. The burden of increased supply pushes down prices and, ultimately, drives up yields. If KEPCO bond yields rise, it is not merely KEPCO’s problem. From the perspective of institutional investors, if AAA-rated KEPCO bonds start offering yields in the 4% range, it becomes difficult for AA or BBB-rated corporate bonds or specialized credit finance bonds with lower credit ratings to attract investors without offering even higher yields. The rise in KEPCO bond yields creates a domino effect that raises the funding costs for all private companies—a so-called “crowding-out effect.”

Previously, after fuel prices soared following the Russia-Ukraine war in 2022, KEPCO issued 37.2 trillion won worth of bonds that year alone. The yield on three-year KEPCO bonds more than doubled, surging from 2.71% at the beginning of the year to over 5% by year-end. The average yield in the corporate bond market spiked to as high as 5.825% in October of the same year. The Legoland incident further aggravated the bond market, causing a liquidity crunch and leaving many companies struggling to secure funding.

Internal Issues at KEPCO... Extended Deficits and Rising Interest Expenses

As of the end of March, KEPCO’s outstanding bonds stood at 70.7 trillion won, with total borrowings exceeding 128 trillion won. Daily interest expenses alone amount to 11.4 billion won, totaling 4.2 trillion won annually. If KEPCO bond yields rise further, the interest applied at each refinancing will increase, and interest expenses will become even larger. In the first quarter of this year, KEPCO posted an operating profit of 3.0784 trillion won, but its total liabilities increased by 800 billion won from the end of last year to 206.4 trillion won. Even with over 3 trillion won in profit, liabilities are still growing. The accumulated operating deficit amounts to 34 trillion won. At the end of 2022, the government doubled, and then quintupled, the cap on KEPCO bond issuance as part of its response to the energy crisis. Currently, KEPCO is allowed to issue bonds up to five times its capital and reserves, equivalent to 121.3 trillion won. When this measure ends at the end of 2027, the fiscal crisis could worsen again. Seung Hoon Yoo, Professor of Future Energy Convergence at Seoul National University of Science and Technology, said, “KEPCO bonds are highly popular due to the national payment guarantee, but if demand is concentrated in KEPCO bonds, general corporate bonds may not sell, making it even harder for companies to raise funds.” Sejong = Lee Dongwoo, Reporter

A view of the headquarters of Korea Electric Power Corporation in Naju, Jeollanam-do. Korea Electric Power Corporation

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