Energy crisis upsets KEPCO and the local debt market

South Korea’s state-owned electrical energy monopoly Kepco final month introduced its greatest quarterly worth improve in additional than 40 years, as turmoil in world vitality markets threatens the mainstay of the nationwide export mannequin that constructed Samsung, LG and Hyundai.

It was the newest signal of a disaster that has additionally gripped the nation’s bond market, which has needed to take up a report quantity of debt issuance as Kepco, which depends on imported fossil fuels, tries to maintain tempo with rising vitality costs.

The results of the value hike following Russia’s all-out invasion of Ukraine final 12 months have been exacerbated by the sharp depreciation of the Korean received towards the greenback because the US Federal Reserve tightened financial coverage.

KEPCO, which issued $17 billion in bonds final 12 months, is anticipated to submit a web lack of 30 trillion received ($24 billion) in 2022, in response to South Korea’s Minister of Commerce, Business and Vitality, in comparison with a lack of 6 trillion received in 2021.

For many years, these utilities have performed a significant position in offering low cost vitality to Korean trade. However that mannequin is beneath risk from rising prices, a weak foreign money, and strain from firms and activists for a sooner vitality transition.

“We should take a look at whether or not a budget tariffs which have been the spine of Korean firms’ competitiveness for many years are sustainable,” mentioned Kim Younger-beom, who served as senior vice minister at South Korea’s Ministry of Economic system and Finance between 2019 and 2021.

Kepco’s 9.5 p.c tariff improve, efficient January 1 this 12 months, follows a number of small will increase in 2022 and comes two days after South Korea’s Nationwide Meeting agreed to lift the corporate’s debt ceiling to a most of six instances fairness, up from the earlier ratio. from two to at least one.

The meeting had initially rejected a proposal to lift the debt ceiling, prompting KIPCO to warn of systemic dangers to the economic system.

“With out elevating the ceiling on company bonds, we will be unable to purchase electrical energy or pay again current loans,” Kipco mentioned in an announcement after the Nationwide Meeting’s preliminary choice in early December to not increase the debt ceiling. This might result in a nationwide financial disaster with blackouts and a paralyzing electrical energy market.

Moody’s famous that the newest tariff improve “isn’t adequate to totally offset the numerous rise in gasoline prices . . . as a result of the sequence of tariff will increase since April 2022 nonetheless falls wanting the rise in enter prices for KEPCO.”

Nevertheless, it added, “The tariff improve — together with the rise in Kepco’s bond issuance restrict — signifies the Korean authorities’s dedication to stop the corporate’s monetary metrics from remaining weak for a sustainable interval and to make sure that the corporate maintains sturdy financing channels.”

Analysts and bond merchants observe that due to this tacit authorities assure of assist, KIPCO continues to have very sturdy credit score rankings regardless of its precarious monetary scenario.

Moody’s rated the corporate’s long-term score at Aa2, the identical because the sovereign credit standing of South Korean authorities bonds. The score is six notches greater than its baseline credit standing of baa2, which Moody’s attributes to “our score of [Kepco’s] Very excessive likelihood of acquiring distinctive assist from, and really excessive stage of dependence on, the Authorities of Korea, if crucial.”

Regardless of an implicitly an identical threat profile, Kepco bonds final 12 months started providing an honest unfold on South Korea’s sovereign debt – an anomaly that bond merchants attribute to considerations in regards to the power of presidency ensures after a Korean native municipality advised in September that it might again down from guaranteeing the money owed of the Legoland theme park developer.

In response to the Korea Securities Depository, the yield on Kepco’s three-year bond was 5.9 p.c in October, in contrast with a yield on a three-year Korean sovereign bond of about 4.3 p.c on the identical time. The yield on Kepco’s three-year bond was 4.5 p.c within the first week of January this 12 months, up from 3.42 p.c on the identical time in 2022.

“The large unfold between Kepco bonds and Korean sovereign bonds was as a result of traders fearful after they realized bonds backed by the provincial authorities might default,” mentioned Choi Jae-hyung, a bond dealer at Hanwha Funding & Securities in Seoul.

“Nobody really thinks that Kipco can default on its debt, however the bonds issued by state-run firms usually are not as liquid as authorities bonds, so Kipco has to supply greater yields,” Choi added.

In response to the liquidity disaster, the Korean authorities introduced a 50 trillion received package deal in October final 12 months to assist credit score markets, beneath which it should purchase a variety of bonds and industrial paper to stabilize the market.

The Financial institution of Korea additionally launched a brief bond-buying program price 6 trillion received, whereas native banks additionally pledged to contribute billions of {dollars} to purchase company debt.

Regardless of the federal government assist, analysts count on yields to stay excessive. “The monetary disaster within the company debt market has now subsided as a result of authorities’s response,” Min Joo Kang, chief economist for South Korea and Japan at ING, wrote in a observe final week. “However it’s anticipated to resurface with the rise in company bond issuance in the beginning of the 12 months and the continuation of excessive rates of interest.”

“The credit score market has stabilized to some extent, however the present construction of KIPCO to compensate for losses by means of bond issuance isn’t sustainable,” mentioned Park Chung-hoon, head of analysis at Commonplace Chartered in Seoul.

“The credit score market disaster will even proceed until the BoK begins chopping rates of interest,” he mentioned. The Financial institution of Korea raised rates of interest by 25 foundation factors to three.5 p.c on Friday, however economists predict the tightening cycle could also be over.

Leave a Comment