South Korea’s state-owned electrical energy monopoly Kepco introduced the biggest quarterly worth improve in over 40 years final month, as turmoil in world vitality markets threatens a central pillar of the nationwide export mannequin that constructed Samsung, LG and Hyundai.
It was the newest signal of a disaster that has additionally roiled the nation’s bond market, which has needed to take in a document quantity of debt issuance as Kepco, which depends on imported fossil fuels, tries to maintain tempo with rising vitality costs.
The consequences of a worth spike following Russia’s full-scale invasion of Ukraine final yr have been exacerbated by a steep fall within the worth of the Korean gained in opposition to the greenback because the US Federal Reserve tightened financial coverage.
Kepco, which issued $17bn of bonds final yr, is predicted to have made a web lack of 30tn gained ($24bn) in 2022, in accordance with South Korea’s minister of commerce, business and vitality, in contrast with a 6tn gained loss in 2021.
For many years the utility performed an important function in supplying low cost vitality to Korean business. However that mannequin is underneath risk as hovering prices, a weakened foreign money, company and activist strain for a sooner vitality transition.
“We must always have a look at whether or not a budget tariffs that have been the spine of Korean company competitiveness for many years are sustainable,” mentioned Kim Yong-beom, who served as first vice minister at South Korea’s ministry of economic system and finance between 2019 and 2021.
Kepco’s 9.5 per cent tariff improve, efficient from 1 January this yr, follows a number of smaller hikes in 2022 and got here two days after South Korea’s nationwide meeting agreed to lift the corporate’s debt ceiling to a most of six instances its fairness, up from a earlier ratio of two to at least one.
The meeting had initially rejected a proposal to lift the debt ceiling, prompting Kepco to warn of a systemic danger to the economic system.
“With out elevating the restrict on company bonds, we won’t be able to buy the electrical energy or repay current borrowings,” Kepco mentioned in an announcement after the nationwide meeting’s preliminary resolution in early December to not elevate the debt ceiling. “This might result in a nationwide financial disaster with electrical energy provide being disrupted and the electrical energy market paralysed.”
Moody’s has famous that the newest tariff improve “just isn’t adequate to completely compensate for a surge in gas prices . . . as a result of the collection of tariff will increase since April 2022 nonetheless stay decrease than the rise in Kepco’s enter prices”.
It added, nonetheless, that “the tariff improve — together with the rise in Kepco’s bond issuance restrict — point out the Korean authorities’s dedication to stop the corporate’s monetary metrics from remaining weak for a sustained interval and to ensure the corporate maintains sturdy funding channels”.
Analysts and bond merchants be aware that it’s due to this implicit authorities assure of help that Kepco nonetheless enjoys rock-solid credit score scores regardless of its precarious monetary place.
Moody’s grades the corporate’s long-term score at Aa2, the identical as its sovereign credit standing for South Korean authorities bonds. The score is six notches increased than its baseline credit score evaluation of baa2, which Moody’s attributes to “our evaluation of [Kepco’s] very excessive probability of extraordinary help from, and a really excessive stage of dependence on, the Authorities of Korea, if vital”.
Regardless of having an implicitly similar danger profile, final yr Kepco bonds began to supply a wholesome unfold on South Korean sovereign debt — an anomaly that bond merchants attribute to considerations in regards to the energy of presidency ensures after a Korean native municipality steered in September that it could renege on a assure over the money owed of the developer of a Legoland theme park.
In accordance with the Korea Securities Depository, in October the yield on Kepco’s three-year bonds reached 5.9 per cent, in contrast with a yield on Korean sovereign three-year bonds of about 4.3 per cent on the identical time. The yield on three-year Kepco bonds was 4.5 per cent within the first week of January this yr, up from 3.42 per cent on the identical time in 2022.
“The huge unfold between Kepco bonds and Korean sovereign bonds was as a result of traders bought apprehensive after they realised even bonds backed by a provincial authorities may go bitter,” mentioned Choi Jae-hyung, a bond dealer at Hanwha Funding & Securities in Seoul.
“Nobody really thinks that Kepco may default on its money owed, however bonds issued by state-run firms will not be as liquid as authorities bonds, so Kepco has to supply increased yields,” Choi added.
In response to the liquidity crunch, the Korean authorities introduced a Won50tn package deal in October final yr to shore up credit score markets, underneath which it’s going to purchase a variety of bonds and industrial paper to stabilise the market.
The Financial institution of Korea additionally launched a short lived bond-buying program value Won6tn, whereas native banks have additionally pledged to contribute billions of {dollars} to purchase company debt.
Regardless of authorities help, analysts count on yields to stay excessive. “The monetary crunch within the company debt market has now subsided because of the authorities’s response,” Min Joo Kang, senior economist for South Korea and Japan at ING, wrote in a be aware final week. “However it’s anticipated to return again to the floor as company bond issuance will increase firstly of the yr and excessive rates of interest proceed.”
“The credit score market has stabilised considerably however Kepco’s present construction of constructing up for losses by issuing bonds just isn’t sustainable,” mentioned Park Chong-hoon, head of analysis at Customary Chartered in Seoul.
“The credit score market squeeze may also proceed until the Financial institution of Korea begins reducing rates of interest,” he mentioned. The BoK raised its coverage price by 25 foundation factors to three.5 per cent on Friday, however economists predict the tightening cycle could also be coming to an finish.
