KEPCO Revamps Bond Bidding Method: "Favorable Impact on Credit" [Click eStock]

KB Securities: "A Positive Move to Reduce Market Noise"

Regional Tariff and Subsidiary Integration Issues Also Seen as "Neutral"

Regarding the change in the Korea Electric Power Corporation (KEPCO)'s bond bidding method from an absolute interest rate to a spread system, KB Securities stated on September 1 that "it could serve as a favorable factor for both KEPCO's interest rates and spreads."

In addition, KB Securities believes that the introduction of a regional electricity tariff system and the integration issue of KEPCO's power generation subsidiaries will have only a limited impact on KEPCO's credit rating. The firm did not provide investment opinions or target prices for individual stocks.

KEPCO has so far conducted bond issuances by bidding at a fixed absolute interest rate; however, it has recently switched to a "spread over individual market consensus" system, where participants bid based on the difference (spread) relative to government bonds.

Previously, investors had to estimate market interest trends on the day of the auction to propose a specific interest rate. Now, they only need to determine how many basis points will be added to or subtracted from the reference yield set by a private bond evaluation agency (the market consensus rate).

Moonhyun Park, research analyst at KB Securities, explained, "With the absolute interest rate auction system, when there was high interest rate volatility on the day of bidding, investors sometimes factored in the possibility of further rate hikes later in the day, resulting in winning bid rates being decided at levels excessive compared to the company's actual credit rating or fundamentals. These results did not always accurately reflect the atmosphere of the actual corporate bond bidding market."

He added, "The shift to a spread-based auction system is viewed as a positive change that can reduce market noise."

Neutral Impact from Industrial Regional Tariff System and Subsidiary Integration

KEPCO Headquarters Building

The announcement on August 26 regarding the introduction of an industrial regional electricity tariff system has also drawn attention. The main point is to divide the country into 11 regions and apply differentiated tariffs based on transmission costs, regional power self-sufficiency, and balanced growth. The newly established "regional adjustment tariff" will be applied to lower rates in each region.

However, this will apply only to industrial tariffs for the time being and will not affect the wholesale market where generators sell electricity to KEPCO. The Ministry of Climate, Environment and Energy (formerly the Ministry of Environment) estimated that KEPCO could face an initial financial burden of approximately 2.8 trillion won as a result.

From a mid- to long-term perspective, Park evaluated that the impact would be neutral, as increased efficiency in the wholesale power market would lead to reduced power procurement costs. However, he added, "It will still be important to monitor how revitalized cash flows for local private power producers, driven by a more efficient wholesale market, might impact their operating results and cash flow."

Regarding the integration of power generation subsidiaries, Park projected that there would be no major changes to KEPCO’s consolidated financial statements. Credit rating agencies evaluate KEPCO’s credit standing based on consolidated statements that include all power generation subsidiaries in which KEPCO holds 100% ownership. If the governance structure changes during integration, an event of default (EOD) stipulated in trustee agreements (which are established to protect bondholders) could occur, potentially leading to a large-scale outflow of funds.

Therefore, Park assessed that there is little likelihood of meaningful changes to the governance structure and concluded, "Even if power generation subsidiaries are integrated, they will not be excluded from KEPCO’s consolidated scope, and there will be no major changes to the financial statements."

This content was produced with the assistance of AI translation services.