Under the lead management of Deutsche Bank and JPMorgan, roadshows for a $200 million to $250 million five-year Reg S bond issue will begin next Wednesday in Hong Kong. Presentations will then move to Singapore, Frankfurt and London, before targeted pricing on either January 22 or 23. Samsung Securities is co-manager.
The A-/Baa2 rated group is being positioned as the natural successor to Kepco, which has long provided corporate Korea's main pricing benchmark. The ongoing privatization of the Korean electricity industry means that Kepco will soon become a transmission and distribution utility with small working capital requirements. Proceeds from the sale of its gencos will, therefore, be used to pay down debt as the company progressively moves into debt re-financing mode.
KHNP, on the other hand, has a heavy capex burden, with annual requirements of Won2 trillion ($1.68 billion) per annum. While most of this amount can be met from internal cash flow, some external funding will be needed as capex peaks over the coming five-year cycle and KHNP officials have said the company intends to build a full yield curve.
Unlike the other five gencos being spun out from Kepco, KHNP will never be privatized because of its strategic national importance. This means it has the same rating as Kepco, while the other five gencos are rated one notch lower by Standard & Poor's.
Pending evidence of a successful genco divestment programme, Moody's also seems likely to raise both Kepco and KHNP to the A3 sovereign ceiling. S&P rates both at this level already.
Key to KHNP's pricing will be where it comes relative to Kepco. Most bankers expect a slight pricing premium given investors' lack of familiarity with KHNP's credit. Yesterday (Tuesday), Kepco's September 2007 bond was being quoted around the 99.82% level to yield 4.29% or 131bp over Treasuries.
This represents a slight widening from the end of last year, while Kowepco (Korea Western Power) has tightened from launch spread of 165bp over Treasuries. At the time of launch in mid-December, the genco's debut $150 million five-year bond was priced at a 40bp premium to Kepco. It has now closed the gap to 23bp, a level that many market participants still consider relatively wide.
Pricing of the Reg S deal suffered considerably from end of year fatigue, a lack of secondary market liquidity and indigestion in the five-year sector. Lead managers of KHNP's issue are likely to hope that the opposite factors will now apply as the market looks forward to the new year.
Specialists emphasize that KHNP is a completely different animal to the other five gencos and nearly three times larger than the smallest in the sector. The group is responsible for generating nearly half of Korea's electricity through 17 nuclear plants and 27 hydro generation plants.
In their ratings analyses both agencies highlighted that KHNP generating capacity represents a "low cost, baseload component of Korea's power mix that will provide the company with stable cash flow."
The world's sixth largest nuclear power generator, KHNP has also been shown to be one of the safest, with an unplanned shutdown rate of only 0.5 cases in 2001 compared to 1.4 in the US and 3.1 in France. The agencies have also said that the company has a strong financial profile. With debt totaling $7.098 billion as of April 2001, the company had a debt to capitalization ratio of 36%. Over the April to December period, it also registered net income of $217 million.
