KB Securities Underwrites, Provides Funding Commitment to SPC... To Be Used for Refinancing and Operating Funds
Expecting Reduction of Borrowings Over 9 Trillion Won Following Performance Improvement Since COVID-19
Hotel Lotte provided indirect financial support for its wholly-owned subsidiary, Lotte New York Palace Hotel. Attention is focused on whether the company can reduce its borrowings, which had exceeded 9 trillion won, as the performance of hotels and duty-free shops improves following the COVID-19 endemic.
According to the investment banking (IB) industry on the 6th, Lotte New York Palace Hotel, LLC, a subsidiary of Hotel Lotte, recently raised $89 million (approximately 110 billion won) with KB Securities as the lead underwriter. KB Securities collected investment funds through a special purpose company (SPC) and lent the money to New York Palace Hotel.
In this process, the parent company, Hotel Lotte, provided a capital replenishment agreement to the SPC. The capital replenishment agreement is a credit provision contract in which Hotel Lotte agrees to support any shortfall if New York Palace Hotel is unable to repay the loan on its own.
Earlier in August, New York Palace Hotel borrowed $150 million (approximately 190 billion won) from domestic investors using the same method. KB Securities also led the underwriting and attracted investors at that time. The funds raised are reportedly planned to be used for repaying existing borrowings and operating expenses.
Hotel Lotte supports the financing of overseas hotels and duty-free shops through such methods. In addition to New York Palace Hotel, it has provided credit guarantees or capital replenishment agreements for borrowings of overseas subsidiaries such as airport duty-free shops in Guam, Japan, and Singapore, as well as Lotte Hotel Holdings USA, Lotte Europe Holdings, and Hotel Lotte Aria.
The group has also continued financial support for its affiliates. At the end of last year, it supported Lotte Construction, which was struggling due to real estate project financing (PF) defaults, with a paid-in capital increase of 86.1 billion won. It also entered into a total return swap (TRS) to compensate investors for losses on 200 billion won convertible bonds (CB) issued by Lotte Construction. This year, it executed a subordinated loan of 150 billion won to an SPC supporting Lotte Construction and provided a capital replenishment agreement as well.
Although the burden of supporting subsidiaries and affiliates continues, borrowings have slightly decreased as performance improves following the COVID-19 endemic. Hotel Lotte’s borrowings rapidly increased from around 6 trillion won in 2018 to 9.5 trillion won by the third quarter of last year due to deteriorated performance caused by COVID-19. By the end of the third quarter this year, borrowings slightly decreased to approximately 8.75 trillion won thanks to improved performance.
However, there are concerns that the actual borrowings are higher due to ongoing support burdens for affiliates. An IB industry official said, "Credit provisions for group affiliates not consolidated under Hotel Lotte could act as a real financial burden depending on the situation," adding, "If the recent trend of improving cash flow, such as increased earnings before interest, taxes, depreciation, and amortization (EBITDA), continues, the financial burden can be further reduced."
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