Kepco appoints debt restructuring advisors

Credit Suisse First Boston and Lehman Brothers are chosen to unwind the utility''s complicated cross-guarantees and covenant restrictions tied its foreign currency debt.

The two banks, which bid together for the mandate, have beaten Deutsche Bank, Goldman Sachs and UBS Warburg, which all bid separately. They will now join Daiwa, already mandated to handle the company's yen-denominated debt.

According to analysts' figures, Kepco has a total debt load of just over $20 billion, of which just over $6 billion is foreign-currency denominated. All debt incurred prior to the separation of five generating assets (gencos) from the parent in April 2001 have cross-guarantees with the parent and it is these guarantees which are now preventing the sale of the gencos to private investors under the next stage of the government's restructuring and privatization of the electricity industry.

The cross-guarantees were initially put in place after the gencos were hived off from the parent to compensate them for being assigned the same debt/capitalization ratio as the integrated entity prior to the split.

In order to facilitate their prospective sale to third party investors, the Ministry of Finance and the Economy (MoFE) proposed that the Korea Development Bank (KDB) should step in and guarantee all Kepco and Genco debt in return for unwinding the guarantees. To compensate the state-owned bank and buffer its capital adequacy ratios against the increase in risk weighted assets this would cause, the government also transferred 127.086 million shares in June 2001, increasing KDB's stake in Kepco by 19.85% to a total of 21.63%.

However, Korean experts say that it has not been fully determined whether the KDB guarantee will cover the whole of Kepco's debt load or just a portion of it. Once this decision has been taken and the cross-guarantees are ready to unwind, the restructuring advisors will then need to decide how to obtain creditors' consent to effect the necessary changes to the company's outstanding debt.

Where the foreign currency debt is concerned, the situation is further complicated by other covenants including provisions requiring the maintainance of majority government ownership. Should the government stake fall below 51%, investors holding some of Kepco's older bonds have the right to accelerate re-payment of interest and principal under event-of-default clauses.

The most likely scenario is that Kepco will solicit international investors consent similar to October 1999 when it sought and failed to gain a waiver to amend event-of-default clauses in its Euro-MTN documentation that might be triggered by major asset sales. Having failed to get enough bondholders to approve the waiver, it went on to successfully complete a tender offering for a number of bonds affected by the clauses.

This time round it is likely to hope that the enticement of a KDB guarantee will be enough of a sweetener to tempt investors to part with their bonds in exchange for new ones with revised documentation. Typically KDB debt trades about 15bp to 25bp tighter than Kepco. The state-owned bank's 6.625% November 2003 bond is, for example, currently trading at a bid/offer spread of 110bp/103bp against a bid/offer spread of 133bp/125bp for Kepco's 6.375% December 2003 issue.

Should the consent solicitation be successful, Kepco should also re-gain the sovereign credit rating. The group is presently rated BBB/Baa3, one notch lower than the sovereign's BBB+/Baa2 ceiling.