What are your borrowing plans for the year?
We are preparing a $300 million 30 year bond, which is part of our funding requirement for the year. We decided to issue a 30 year bond because the domestic capital market accomodates only maturities of five years or less.This means our average debt duration is relatively short - it is slightly over four years. So we'd like to extend the duration.
Also the treasury yield is relatively low so this is perfect timing and so we can take advantage of the very low benchmark yield and very tight spread. We believe we can issue the 30 year bond with a total yield of around 6%.
This is a good rate and in the long run we also believe that the Korean won will strengthen against the US dollar, so in that sense this is a really good funding opportunity.
So you won't swap it? You will leave it unhedged?
For the time being yes. We don't want to hedge.
Is a higher oil price a big issue for Kepco?
We are quite well diversified. About 40% of power comes from nuclear, 40% from coal and 20% from oil and LNG.
When do you plan to launch your bond?
Most likely after April 19. [Editor's note: ABN AMRO, Deutsche and Morgan Stanley have been mandated]
Will that be your main funding exercise?
It will be our main funding for the first half, but we will tap the international market again in the second half. Our overseas funding is limited to maturing foreign debt and this year we have $1.2 billion maturing.
Historically we finance internationally only 50% of the maturing foreign debt, which means in the second half we will borrow another $300 million.
So your debt is now mostly raised locally?
Yes. In 1998 our foreign debt amounted to $9.9 billion and since then we have tried to decrease it as much as possible. Last year it was $5 billion. And by the end of this year it will be $4.5 billion.
Also we have been heavily dependent on the US dollar. In 1997 it made up 90% of foreign borrowing, so we have tried to decrease that. US dollars now make up 50% of foreign borrowing.
Our total debt is constituted of 60% Korean won, 20% US dollar and 20% Japanese yen.
So is the US capital market becoming less and less relevant to Kepco?
I could say yes.
What is the ideal mix between US dollar and local borrowing for you?
Our ultimate goal is 70% Korean won, and 30% in foreign currencies. And that means 15% in US dollars.
So compared to 1997 the US dollar market is much less important for you than the Korean domestic market?
Yes. The cost from the domestic market is relatively low. We are only paying 5% for five year funding. So we don't see any big merit in terms of US dollar coupons, and we don't have to takee FX risk.
In terms of our domestic borrowing we get 20% as bank loans and the remaining 80% are local bonds. The latter have three and five year maturities.
This year our funding requirement is the US-dollar equivalent of $4 billion. And 80% of that will be raised in the domestic capital market.
What's your outlook for interest rates both in Korea and the US?
I don't see either rising much in either because we don't see an inflation factor. So rates will be stable for 12 months. Gradually the Korean corporates will increase their capex expenditures and so inflation will go up gradually next year.
So this year we are focusing on longer maturity funding, to lock in low funding costs.
So in the domestic market will you also try and issue longer term bonds eg 10 years?
Yes, but there is not much demand. The curve at five years is quite liquid. But for the 10 year part of the curve we can raise just $100 million, and only from time to time. And based on the nature of our business we need to keep the average duration around 10 years. That's why we still have to use the international capital market - to get longer duration funding, such as the 30 year.
The 30 year should take our average duration from four years to five years. And the bond we do later this year will be a 10 year.
So the only reason you now use the international market is for duration extention?
Duration and also funding is relatively cheaper. We believe the Korean won will strengthen which will make dollar borrowing cheaper than the local market.
