Hotel Lotte Faces Increased Financial Burden with 200 Billion KRW Additional Borrowing for Remodeling and Affiliate Support

Largest Fundraising Among Lotte Affiliates This Year
Financial Burden Continues Due to Slow Recovery Pace

This year, until February, Hotel Lotte, which issued large-scale corporate bonds, borrowed an additional 200 billion KRW in the capital market. New funds need to be invested in remodeling several hotels in Seoul, and there has been a financial burden due to support for Lotte Construction. Although the end of the COVID-19 pandemic has led to some improvement in performance by escaping deficits, the heavy financial burden from past large-scale investments has not improved over a long period.

According to the investment banking (IB) industry on the 19th, Hotel Lotte received a loan of 200 billion KRW from a special purpose company (SPC) organized under the leadership of Shinhan Bank. The maturity is three years, and the interest rate is known to be in the 4% range. Although the repayment is a lump sum at maturity, early repayment before maturity is possible if the lending consortium agrees. Shinhan Bank, which managed the fundraising, provided the SPC with a liquidity commitment agreement with a limit of 1 billion KRW. This credit commitment means that funds will be supported within the limit in case of contingencies such as Hotel Lotte’s default.

Hotel Lotte is considered the affiliate with the largest external borrowing within the group this year. In January this year, it issued 300 billion KRW worth of public corporate bonds under the management of Samsung Securities, and in February, it issued 150 billion KRW worth of private corporate bonds under the management of Shinhan Investment Corp. As a result, it became the company that issued the most corporate bonds within the Lotte Group this year.

The increase in Hotel Lotte’s fundraising is due to the continued maturity of borrowings alongside increased capital needs from expanded investments and affiliate support. Most of the funds raised until February were used to repay maturing borrowings. Additionally, Hotel Lotte began remodeling hotel rooms in Seoul this year, and remodeling of Mapo City Hotel and Hongdae L7 Hotel is also expected to proceed. Credit commitments were also provided during the fundraising process for overseas affiliated hotels such as the New York Palace Hotel in the United States.

The financial support burden for Lotte Construction also continues. In November 2022, Hotel Lotte injected 86.1 billion KRW in a paid-in capital increase for Lotte Construction. Starting with this, in December of the same year, it signed a total return swap (TRS) contract with a special purpose company (SPC) that acquired 200 billion KRW worth of convertible bonds (CB) issued by Lotte Construction. Under this contract, Hotel Lotte must compensate for any losses incurred from the CBs issued by Lotte Construction.

Last year, Hotel Lotte executed a subordinated loan of 150 billion KRW for a 1.5 trillion KRW fund supporting Lotte Construction’s project financing (PF) sites amid crisis rumors. This year, with Taeyoung Construction entering corporate workout for financial restructuring, the existing support fund for Lotte Construction increased to 2.4 trillion KRW, leading to an increase in the subordinated loan amount.

As the financial burden increases, Hotel Lotte’s financial situation has not significantly improved. Borrowings, which were below 6 trillion KRW in 2018, increased to 9.26 trillion KRW at the end of 2012, then slightly decreased to 8.75 trillion KRW as of the third quarter of last year. Net borrowings, excluding cash equivalents from borrowings, increased from 4.26 trillion KRW to 7.46 trillion KRW during the same period.

An IB industry official said, "Due to the sluggish Chinese economy, even after the COVID-19 endemic, the number of Chinese tourists has not significantly increased, so the performance of duty-free shops and hotels has not recovered to pre-COVID-19 levels," adding, "It will be difficult to expect a significant improvement in financial structure for the time being due to hotel remodeling and affiliate support."