KEPCO bonds rate distorting wider bond market: experts

KEPCO headquarters / Korea Times file

By Yi Whan-woo

Korea Electric Power Corp. (KEPCO) is moving faster on issuing bonds at higher coupon rates this year in a bid to cover snowballing losses, with the rate for the firm's five-year bond hitting a 13-year high of 4.48 percent last month.

While the state-run electricity supplier is enjoying a sharp rise in bond sales, other companies find it tough to keep up with KEPCO's coupon rates and accordingly struggle in issuing corporate bonds to raise money.

KEPCO bonds are also popular because the government guarantees recurring interest payments and return of the principal at the date of maturity.

Market observers warn that KEPCO being overly popular in the bond market can disrupt financing of pandemic-disrupted enterprises at a time when the key interest rate is being hiked rapidly over inflation and taking out bank loans is becoming increasingly expensive.

“The increase in a corporate bond's coupon rate makes sense in general because the rate is influenced by the policy rate,” a source said. “But even so, the coupon rates of KEPCO bonds are way too high.”

According to Korea Securities Depository, which offers support for securities financing and other related services, the coupon rate for KEPCO's five-year bond stood at 4.48 percent on June 22 as compared to 2.53 percent on Jan. 4.

The 4.48 percent figure is the highest coupon rate since 2009 during the global financial crisis.

Between Jan. 4 and June 22, the coupon rate for a two-year bond rose from 3.4 percent to 4.1 percent, while that of a three-year bond climbed from 3.9 percent to 4.3 percent.

The bonds issued by KEPCO this year so far are worth more than 14 trillion won ($10.6 billion.)

KEPCO says issuing bonds at a higher interest rate was needed to overcome its growing operating loss, after it logged a record 5.9 trillion won in 2021. The amount for this year is anticipated to reach up to 20 trillion won in the worst case.

Under the circumstances, the companies in general are hesitant to issue bonds unless their credit ratings are higher than KEPCO's to woo investors, or they can afford to offer a coupon rate higher than KEPCO's.

For instance, GS Entec, a subsidiary of GS Group, issued a three-year bond at a coupon rate of 5.292 percent on July 8.

The value of the corporate bonds issued was worth 2.59 trillion won in June, down from 5.22 trillion a year earlier.

“The increase in number of bonds issued by KEPCO is certainly burdening the market,” Daishin Securities analyst Kong Dong-rak said.