[Funding] Lotte Chilsung Repays Perpetual Bonds with Short-Term Borrowing... Focus on Cost Reduction

'CP+Dangjwa' 200 Billion Short-Term Borrowing Increase
Measure to Reduce Perpetual Bond Interest Expenses
Some Financial Indicators Like Debt Ratio Rise Unavoidable

[Asia Economy Reporter Lim Jeong-su] Lotte Chilsung, a beverage and liquor company under Lotte Group, will repay 200 billion KRW worth of hybrid capital securities (perpetual bonds) privately issued in 2019 by borrowing short-term loans. As the call option exercise period for the early redemption of the perpetual bonds approaches, it is known that the company is making an early repayment to prevent an increase in interest expenses due to non-exercise of the call option. While repaying the perpetual bonds recognized as equity in accounting, it is expected that financial indicators such as the debt ratio will somewhat deteriorate as short-term borrowings increase.

Lotte Chilsung plans to additionally issue 150 billion KRW worth of commercial paper (CP) soon. As of the 15th, Lotte Chilsung’s CP balance stands at 50 billion KRW. If an additional 150 billion KRW worth is issued, the CP balance will increase to 200 billion KRW. In addition to CP, they have decided to set up an additional 50 billion KRW overdraft facility. If the overdraft is fully utilized, borrowings will increase by about 200 billion KRW.

The funds raised through CP issuance will be used to repay the perpetual bonds. Lotte Chilsung issued 200 billion KRW worth of privately placed perpetual bonds with a 30-year maturity in January 2019. This was to improve the deteriorated financial structure caused by poor performance and increased investments.

At that time, Lotte Chilsung’s borrowings increased due to the burden of new and expanded beer factories and equity investments in affiliates, and the liquor business’s sluggishness led to three consecutive years of net losses starting from 2018. With the launch of Lotte Holdings, high-quality assets worth about 1 trillion KRW, accounting for over 20% of total assets, were transferred to the holding company, causing the debt ratio to rise and financial indicators to worsen. By issuing perpetual bonds recognized as equity in accounting, they improved financial indicators such as the debt ratio and creditworthiness.

When issuing the perpetual bonds, Lotte Chilsung held a call option allowing early redemption after three years. If the call option is not exercised in January next year, three years after issuance, interest expenses will increase. The initial coupon rate of the perpetual bonds was 3.49%. If the call option is not exercised, interest expenses will rise by 150 basis points to 4.99%. If the perpetual bonds remain outstanding, interest expenses will gradually increase, leading to a continuous rise in interest burden.

An investment banking industry insider interpreted, "Lotte Chilsung increased low-interest short-term borrowings as a source for early redemption of the perpetual bonds to alleviate the high-interest burden of the perpetual bonds."

However, repaying the perpetual bonds through short-term borrowings inevitably damages some financial stability. While short-term borrowings increase by 200 billion KRW, the perpetual bonds disappear from the equity account, causing the debt ratio to rise.

Last year, Lotte Chilsung’s consolidated debt ratio rose to 180%, but thanks to improved performance from a rebound in liquor sales and reduced selling and administrative expenses this year, it decreased to about 155% at the end of the third quarter. If borrowings increase by 200 billion KRW to repay the same amount of perpetual bonds, the debt ratio will simply rise again to 195%.

An industry insider said, "Lotte Chilsung is focusing its financial strategy on reducing actual costs and improving profitability rather than accounting indicators like the debt ratio," adding, "There is concern that financial figures may worsen again as the liquor business falls into a slump due to the spread of the COVID-19 Omicron variant."