KEPCO's Corporate Bond Limit '5 Times Capital' Likely to Increase Again Next Year... Disrupting the Bond Market

As the decision to raise electricity rates is delayed, Korea Electric Power Corporation's (KEPCO) deficit is rapidly increasing. There are even concerns that if funds are raised through corporate bond issuance (KEPCO bonds) until the end of the year without a rate hike, the bond issuance limit will need to be further expanded through a legal amendment in March next year.

According to KEPCO on the 23rd, the net issuance of corporate bonds issued for fundraising until mid-April this year amounted to 7.2 trillion won. This is about 25% of the scale that can be newly issued this year (28.2 trillion won) within the corporate bond issuance limit raised by the amendment to the KEPCO Act last year.

[Image source=Yonhap News]

The problem is that if electricity rates are not raised, KEPCO is expected to record a net loss again this year due to deficits, and there is a high possibility that it will have to raise funds by exceeding the corporate bond issuance limit by the end of this year. Considering the speed and scale of corporate bond issuance until mid-April this year, KEPCO internally anticipates net issuance of around 24 trillion won by March next year when the shareholders' meeting is held.

Ultimately, adding the cumulative issuance amount of long-term bonds and others (76.4 trillion won), KEPCO will exceed the current legal limit on bond issuance by March next year. Depending on the scale of the net loss in this year's settlement, KEPCO may enter a state of 'partial capital erosion' or 'complete capital erosion.' Following the National Assembly's adjustment of the KEPCO bond issuance limit to 'five times the sum of reserves and capital stock' at the end of last year, another legal amendment may be required within about a year.

The industry holds the view that a phased rate adjustment is inevitable to resolve KEPCO's deficit. Ahead of the rate hike decision, KEPCO is considering returning wage increases for some executives and employees (from November last year to November this year) in response to the ruling party's pressure to first present high-intensity self-rescue measures to improve the financial structure.

However, the government and ruling party have not yet decided on KEPCO's second-quarter rate hike. They also point out that internal efforts for self-purification should take priority, addressing issues such as allegations of misconduct and corruption in solar power projects involving some KEPCO employees' families and concealment in the audit results of Korea Energy Engineering University (KEPCO University).

The Electricity Committee under the Ministry of Trade, Industry and Energy, responsible for reviewing electricity rates, is scheduled to meet on the 28th, but since the final rate decision authority lies with the government, it is expected that announcing a rate hike plan within this month will be difficult.