Lotte Chemical and Lotte Holdings Credit Rating Deterioration
Difficult to Expect Further Group Support
Overcoming PF Liquidity Crisis Enables Independent Fundraising
Lotte Construction has begun securing liquidity to repay maturing borrowings through public bond issuance and loan securitization. Due to the deterioration in the credit ratings of Lotte Group affiliates such as Lotte Chemical, which had been strong supporters, it has become difficult to expect further direct or indirect affiliate support. Fortunately, with the support of financial institutions, the liquidity crisis caused by project financing (PF) defaults has been resolved, enabling self-financing.
According to the investment banking (IB) industry on the 18th, Lotte Construction raised 20 billion KRW by securitizing loans under the lead of Shinhan Bank. A special purpose company (SPC) established by Shinhan Bank provided a two-year loan, and then issued short-term bonds using the loan principal and interest receivables from Lotte Construction as underlying assets (collateral). When Lotte Construction repays the loan principal and interest, the funds are used to redeem the short-term bonds.
The short-term bonds will be reissued every three months over the next two years. If there is insufficient demand for the short-term bonds at the time of refinancing, Shinhan Bank has agreed to purchase them instead. The lead manager has provided a bond purchase commitment. The funds raised will be used to repay maturing borrowings.
Additionally, Lotte Construction is planning to issue up to 200 billion KRW in unsecured public bonds. To this end, KB Securities, NH Investment & Securities, Korea Investment & Securities, and Kiwoom Securities have been selected as lead managers. Shinhan Investment Corp. and Daishin Securities will also participate as bond underwriters.
This is the first time Lotte Construction is issuing public bonds on its own without a guarantee from Lotte Chemical since the PF crisis emerged. Previously, in February, it issued guaranteed bonds with a guarantee from Lotte Chemical at an interest rate in the 4% range.
Most of the funds raised through the public bond issuance will be used to repay short-term borrowings. During the height of the PF crisis in February this year, Lotte Construction issued commercial paper (CP) and short-term bonds with maturities of six months at interest rates in the mid-to-high 6% range. These short-term borrowings will mature in August and September, with 110 billion KRW and 20 billion KRW respectively. Additionally, 40 billion KRW worth of corporate bonds issued in 2021 will mature in September.
Recently, demand for high-interest corporate bonds, mainly from retail investors, has increased, making it possible to issue corporate bonds at relatively low interest rates despite credit rating deterioration. It is understood that Lotte Construction can issue bonds with a 1 year and 6 months maturity at an interest rate in the 5% range even without a guarantee from Lotte Chemical.
An IB industry official said, "Lotte Group has continuously provided direct and indirect financial support to Lotte Construction, and financial institutions including the four major commercial banks resolved short-term liquidity issues caused by PF defaults with a 2.3 trillion KRW fund," adding, "As concerns over Lotte Construction’s default have eased, it has become possible to raise funds independently."
The deterioration in the credit ratings of group affiliates such as Lotte Chemical also played a role in forcing Lotte Construction to secure funds independently. Recently, the three domestic credit rating agencies changed the outlook for Lotte Chemical (credit rating AA) from 'stable' to 'negative.' This was due to worsening supply and demand conditions caused by capacity expansions by Chinese competitors, prolonged operating losses, and overlapping support for Lotte Construction, which worsened its financial situation.
Consequently, the credit outlook for corporate bonds issued by Lotte Construction with Lotte Chemical’s guarantee was also changed to 'negative.' Furthermore, the outlook for Lotte Holdings (AA-) was changed to 'negative,' increasing the likelihood of a credit rating downgrade.
An IB industry official said, "As credit ratings deteriorate for petrochemicals and holding companies following construction, the financing capabilities of Lotte Group affiliates are declining," and added, "For the time being, inter-affiliate financial support will be minimized, and each affiliate will respond to the repayment of maturing borrowings on its own."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
