[Click eStock] "Lotte Chemical, Financial Risk Expansion is Limited... Target Price Down"

Target Price Adjusted Down from 110,000 Won to 90,000 Won

On the 21st, Samsung Securities downgraded the target price of Lotte Chemical from 110,000 KRW to 90,000 KRW, viewing the expansion of financial risk as limited. The investment opinion was maintained as 'Buy.'

Hyun-ryeol Cho, a researcher at Samsung Securities, explained, "Considering the recent deterioration of investment sentiment due to concerns over rising financial risks, we have lowered the target price, but we maintain the investment opinion given the low possibility of liquidity risk expansion." He added, "For the recovery of investment sentiment from the perspective of stock investors, short-term performance recovery and mid-to-long-term asset lightening focused on the reduction of petrochemical facilities are necessary."

According to industry sources, Lotte Chemical is expected to announce a meeting notice for corporate bondholders on the 21st to resolve reasons for violating financial covenants. Lotte Chemical's corporate bonds include covenants requiring the maintenance of certain financial ratios until principal and interest are repaid, such as a debt ratio of 200% or less based on consolidated financial statements and an EBITDA-to-interest expense ratio of 5 times or more averaged over three years. It has been confirmed that Lotte Chemical violated these covenants due to a prolonged deficit causing the EBITDA-to-interest expense ratio to decline. Researcher Cho stated, "Lotte Chemical included covenants based on profit-generating ability during the bond issuance process, which is unusual but presumed to be based on previously strong profit-generating capacity. Recently, a sharp decline in profits and increased investments have caused covenant violations. Although the EBITDA-to-interest expense ratio set during bond issuance requires maintaining 5 times or more, it is expected to plummet from 27.8 times in 2021 to 1.1 times this year and recover to 6.4 times by 2026," he analyzed.

Considering past cases, the possibility of risk expansion is limited. Researcher Cho said, "Based on past cases (Korean Air, Doosan Heavy Industries & Construction, Hanjin Heavy Industries & Construction, Korea Aerospace Industries, etc.), financial covenant relaxations have resolved such issues, so if consent from bondholders is secured this time as well, the expansion of financial risk will be limited."