Hotel Lotte Faces Increased Support Burden for Overseas Hotel 'Arai Hotel' in Japan

[Asia Economy Reporter Lim Jeong-su] As the financial distress of overseas hotels owned by Hotel Lotte deepens, the burden of financial support is also increasing. Recently, Hotel Lotte provided a new capital replenishment agreement to help finance the Arai Hotel Resort in Japan, and previously extended credit facilities to secure emergency operating funds for hotels located in New York, USA, and Europe. In this process, Hotel Lotte’s contingent liability burden is also expanding.

According to the investment banking (IB) industry on the 22nd, Hotel Lotte ARAI raised operating funds amounting to 962.46 million yen (approximately 10 billion KRW) under the management of KTB Investment & Securities. The loan has a one-year maturity with a lump-sum repayment condition at maturity. During this process, the parent company, Hotel Lotte, provided a capital replenishment agreement. This agreement means that if Hotel Lotte ARAI struggles to repay the loan, Hotel Lotte will bear the repayment funds on its behalf.

Previously, Hotel Lotte had provided payment guarantees for borrowings totaling 21 billion yen (about 200 billion KRW) as Arai Hotel borrowed funds from KEB Hana Bank, Korea Export-Import Bank, and IBK Industrial Bank of Korea. It is understood that Hotel Lotte’s credit exposure to Arai Hotel has increased with this recent operating fund procurement.

Arai Hotel is a luxury resort located in Mokyo City, Niigata Prefecture, Japan, wholly owned by Hotel Lotte. Recently, its management has deteriorated due to COVID-19, causing difficulties in securing operating funds.

Earlier, Hotel Lotte also extended credit facilities to Lotte Hotel New York Palace, LLC, which raised operating funds amounting to 80 million USD (approximately 90 billion KRW). Lotte Hotel New York Palace is a hotel located in New York, USA, wholly owned by Lotte Hotel Holdings USA. It has continued to operate at a loss since Lotte Group acquired it for 900 billion KRW.

Additionally, in the first half of this year, Hotel Lotte provided credit facilities for Lotte Europe Holdings, a 100% subsidiary of Hotel Lotte, to raise 100 million euros (approximately 135 billion KRW). Lotte Europe Holdings is a European regional holding company based in the Netherlands, wholly owned by Hotel Lotte, established mainly to oversee Russian hotels, department stores, confectionery businesses, and other Russian operations as well as European subsidiaries.

Due to the successive credit extensions, Hotel Lotte’s contingent liability burden is continuously increasing. As of January this year, the amount of payment guarantees provided by Hotel Lotte for overseas hotels and others exceeds 2.8 trillion KRW. The problem is that as COVID-19 has not subsided, the support burden continues to grow. Hotel Lotte’s consolidated borrowings approach 9.3 trillion KRW.

An IB industry official said, "If COVID-19 prolongs further, the large-scale payment guarantees could materialize into Hotel Lotte’s own borrowings," adding, "It is expected that they will respond by attracting new investments or selling assets such as Lotte in Shenyang, China."