Blackpink or BlackGold? Short KNOC notes

5 minute read

Korea National Oil Corporation (KNOC) has fully wiped out its equity. We analyse the credit scenario where the Republic of Korea lets the BlackGold oil sand project go and bets on the Blackpink COP26 trajectory instead.

KNOC bonds trade close to the Korean sovereign. We highlight ways to short the bonds through the cash market, through CDS and through basic underweights in benchmarked portfolios.

We see a non-zero probability of a withdrawal of government support that would effectively put bond investors at high risk of being restructured, with low recovery values. Among other things, KNOC remains a financial sinkhole for the taxpayer. Further capital injections to KNOC must be approved by Parliament, but recapitalising KNOC will not help South Korea’s negotiations at COP26.

We see a non-zero probability of the company losing its historically friendly relationship with international capital. Furthermore, the company is currently in the market looking to sell bonds. The success of that bond issuance should not be a given: many ESG minded financial institutions apply exclusions for tar sands financing. Specifically, Swiss investors like UBS and Credit Suisse - appearing as the biggest lenders in KNOC hard currency bonds - may have an appetite that is disappearing even faster than the Great Aletsch Glacier.

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