AAA Kepco does a job on the bond market as funding vanishes

A pedestrian walks past a Kepco office building in central Seoul. [NEWS1]

Korea Electric Power Corp. (Kepco) is sucking billions of dollars out of the country's debt market, crowding out corporate borrowers with credit ratings lower than that of the debt-ridden, state-backed company.

The liquidity situation is not likely to lead to a corporate credit crunch as severe as in the latter half of last year, when a Legoland-related debt default further aggravated market conditions, yet companies with lower credit ratings are already feeling the heat.

About 5 months into the new year, the state-run utility, which is rated AAA, issued 9.35 trillion won ($7.06 billion) of corporate bonds, according to the Korea Financial Investment Association's Bond Information Service.

That is 29 percent of total bonds issuance by Kepco last year, which was a record 31.8 trillion won.

Kepco is selling bonds at an even faster pace than during the same period last year. In the first quarter, the company issued 8 trillion won of bonds, up 16.6 percent on year compared to the previous year.

The excess supply of Kepco bonds may put the bond market under strain as investors flock to the high-quality paper while avoiding riskier corporate offerings with lower credit ratings.

Shinsegae E&C, which is rated A, recently missed an 80 billion won sales target for two-year bonds by 70 billion won. GS Entec, rated A, Korea Real Estate Investment & Trust, rated A, and Hyundai Motor Securities, rated AA-, also failed to meet sales targets.

"Last year, yields on Kepco's corporate bonds hit 5.99 percent, yet the figure declined to the 3.5-percent level at the beginning of the year as the Legoland-related debt default situation settled down," Kang Seung-yeon, an analyst at DS Investment & Securities, said. "But the recent increase in the bond issuance is pushing up yields again, which sparked concerns of a possible crowding out effect."

Its impact on the debt market will be limited compared to last year when the Legoland-related default added pressure to the market, but the effect is likely to be unevenly distributed across credit ratings, according to Kang.

"Corporate bonds with lower credit ratings may be affected, but high-quality bonds are not likely to be hit by a liquidity crunch like they did last year," Kang added.

In a report issued on April 12, Jeong Hye-jin, an analyst at Shinhan Investment and Securities, said that "the polarization in the market between high- and low-grade bonds will persist through the year."

Bank of Korea Gov. Rhee Chang-yong said on April 11 that the liquidity situation in the bond market won't be as severe as last year, during which "the excess supply was a burden itself, yet the impact was amplified as the market faced a liquidity crunch triggered by the Legoland-related debt default."

Rhee added that he expects "the government will raise electricity rates to a certain level to address the issue" of Kepco's rising debt.

Kepco's move is driven by big losses.

Last year, Kepco posted a record operating deficit of 32.7 trillion won and a net loss of 24.4 trillion won due to soaring fuel prices. The market forecast the utility to report an operating loss of 5.48 trillion won in the first quarter of this year.

The deficits may rise higher than initially forecast through the year with the Organization of the Petroleum Exporting Countries Plus's decision to cut crude production.

One alternative source of funding is raising electricity rates.

In order to erase Kepco's rising deficit, rates for electricity would have to be increased by at least 51.6 won per kilowatt-hour in 2023, which is three times the 19.3 won per kilowatt-hour increase through 2022, according to the Energy Ministry's report.

The utility rate decision, which was supposed to be announced before the second quarter began, has been delayed as the lawmakers and the government have failed to reach a consensus on the scale of the increase.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]