Hankyung Rating "May Repeat Every Quarter"
Nashin Rating "Concerns Over Forced Early Bond Repayment"
Despite Lotte Chemical announcing that it will negotiate with bondholders regarding the non-compliance with financial covenants on some corporate bonds, the credit rating industry pointed out the possibility of risk expansion and recurrence of similar cases.
On the 21st, Korea Ratings analyzed the situation related to Lotte Chemical, which triggered an Event of Default (EOD) due to failure to maintain financial ratio covenants, stating, "As long as the covenant conditions include this clause, the cause for EOD may repeatedly occur every quarter in the short to medium term."
Yoo Jun-wi, Senior Researcher at Korea Ratings’ Corporate Division 1, released a report on the same day, saying, "It is unlikely that Lotte Chemical’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to interest expense ratio will exceed 5 times in the short to medium term."
Lotte Chemical holds KRW 1.8 trillion in cash equivalents on a standalone basis and KRW 3.6 trillion on a consolidated basis, so the industry consensus is that there should be no difficulty in repaying borrowings maturing by March next year under normal circumstances.
However, Researcher Yoo pointed out, "If even one Event of Default declaration occurs through a bondholders’ meeting convened by creditors separately from the one convened by Lotte Chemical, it could spread to an immediate loss of benefit of maturity for all bonds." He added that they plan to monitor Lotte Chemical’s response and the convening and resolutions of bondholders’ meetings and reflect these in the credit rating.
Kim Seo-yeon, Senior Researcher at NICE Investors Service, forecasted, "Even if creditors agree to contract modifications, they may demand an increase in interest rates due to recent rises in bond yields. Creditors who do not agree to contract changes may demand early repayment of the outstanding bond balance."
If creditors fail to reach an agreement, they may convene a bondholders’ meeting to declare an Event of Default and force early repayment of the relevant bonds. If a specific corporate bond faces an Event of Default, there is also a possibility that, according to borrowing agreements, the benefit of maturity will be lost not only for bonds but also for all borrowings including bank loans.
Researcher Kim noted, "If a smooth response is not achieved, there is an inherent risk of a sharp increase in Lotte Chemical’s liquidity risk," pointing out that bondholders’ meeting outcomes could lead to contract modifications or early repayment demands, depleting available liquidity and creating additional funding burdens.
Meanwhile, Lotte Chemical recently failed to comply with the financial ratio maintenance covenant in the bond management agreement as its average EBITDA to interest expense ratio over the past three years fell below 5 times. The scale of Lotte Chemical’s corporate bonds issued under this covenant amounts to KRW 2.045 trillion, accounting for 89% of the total corporate bond balance. However, bonds issued since September last year do not include this condition.
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