Kepco, Korea's state-controlled power utility, plans to launch a euro-denominated bond in the first half of this year. The company, which has $1.3 billion of foreign debt maturing this year, will refinance at least $800 million, says Myung Hwan Kim, Kepco's general manager in charge of borrowing.
He says that Kepco's board has already given approval to tap the international markets with a bond issue of around $300 million. Kim's preference is to launch a euro currency deal, which would suggest a size of around E230 million. He says the maturity has not been finalized, but it will be either five or 10 years.
It looks likely, however, that Kepco's preference will be for 10 year money. "We can easily raise 3-5 year money in the domestic capital market," he says. "If we issue a Korean won bond, we're paying around 4% for three years and 4.5% for five years. But we use the international market to extend the average duration of our debt portfolio. Because of the nature of our business we need an average duration of 7-8 years, but currently we raise 75% of our funds in the domestic market where the average duration is just over three years."
Therefore a 10 year bond will be the appropriate option for Kepco. And the choice of euro will see Kepco follow other top Korean borrowers such as Kexim and KDB into that currency. Kim says Kepco will target a coupon of less than 5%.
The way Kepco analyses the international markets is somewhat different to many other borrowers. The company has almost entirely Korean won revenues and only swaps a portion of its borrowings back into won. It therefore takes very strong directional views on the currencies in which it borrows.
Kim says this means that Kepco's approach to borrowing is less sensitive to spreads than the coupon paid plus-or-minus the forex gain or loss. "We have a forecast that the euro will weaken against the dollar and the Korean won will strengthen against both the euro and dollar."
Kim says Kepco's approach is to progressively swap more of the forex exposure into won as the currency in question moves into line with its own fair value assumption - locking in currency gains in the process.
Kim believes Kepco can therefore save a great deal in borrowing cost by issuing in euros. It will benefit from the currency depreciating against the won, and also from the lower absolute cost versus dollars - since the 10 year German government bond is currently trading at around 3.59%, versus 4.43% for the 10 year US treasury.
Kepco, which is currently being advised on its borrowing strategy by UBS, has yet to select lead managers for the forthcoming euro deal. Moreover, it has a bridge loan in place that leaves it under no immediate pressure to issue. However, Kim says that only the documentation needs to be put in place and Kepco could print a deal reasonably quickly. He says he would like to issue when the dollar/euro exchange rate is around 1.3, versus 1.28 today.
Timing-wise, another consideration is the Republic of Korea's sovereign bond. The Republic is due to do a non-deal roadshow in May (just after the ADB meeting in Istanbul) and will most probably launch a $1 billion-equivalent offer in June. It is highly likely this deal could also be in euros and likewise a 10 year maturity. Thus Kepco will be keen to avoid issuing on top of the sovereign. This might lead it to launch slightly earlier in May, depending on market conditions.
Kim says he is keen to launch his deals earlier rather than later this year, since the overall trend is for rate rises. His second bond of the year will be a $500 million-equivalent issue, although he says no decision has been taken yet on which currency this will be issued in.
Another factor that may determine the launch date is publication of a Moody's review of Kepco's rating. Moody's will complete the review towards the end of this month and some investors are expecting an upgrade from A3 to A2. Should that be the case, Kepco may be keen to launch its deal after Moody's verdict comes out.
The company itself is doing well. It typically sees power usage grow at around 1.5 times the rate of economic growth. That means that it expects to see power usage growth this year of over 7%, following 6% last year. Kepco has been throwing off free-cashflow of between W1-2 trillion for the past three years and pays a dividend of around W700 billion. It is currently looking at using its free cashflow to expand into high growth opportunities in other countries such as the Philippines, Egypt and China.
Kepco's cashflows currently remain linked to the growth of the domestic economy, and Kim is very optimistic on this front. "Consumer confidence is sharply improving," he observes. "For the past few years export growth led the economy, but I can see many signals of improving domestic consumption. There are more people in department stores, more people in the streets and more traffic at night. The domestic consumption issue is therefore bottoming out. This year we can see over 5% GDP growth."
