Lotte Construction Cuts Contingent Liabilities by 3 Trillion Won... Struggling Amid Group Liquidity Crisis [Why&Next]

Early Groundbreaking and Sales Strategy Eases Liquidity Crisis
Restructuring and Rising Raw Material Costs... Uncertainty Persists

Since the Legoland incident two years ago, Lotte Construction, which had been plagued by liquidity crisis rumors, has reportedly reduced its project financing (PF) contingent liabilities by about 3 trillion won. By advancing the groundbreaking and sales schedules of major projects and converting bridge loans into main PF loans to quickly put out fires, as well as operating various task forces (TFs) outside the framework of the existing organization for swift decision-making, the company is evaluated to have effectively managed the situation.

However, with the political turmoil, the real estate market is expected to become even more challenging, leading to predictions that Lotte Construction’s strategy may not be as effective this year.

Lotte Construction Building, Seocho-gu, Seoul. Provided by Lotte Construction

◆ Lotte Construction Reduced Contingent Liabilities by 2.9 Trillion Won = According to industry sources on the 31st, Lotte Construction’s PF contingent liabilities as of the end of last year are estimated at about 3.9 trillion won. This marks a reduction of 2.9 trillion won from 6.8 trillion won at the end of 2022, when the Legoland incident occurred. Lotte Construction faced a liquidity crisis related to PF following the ‘Gangwon Jungdo Development Corporation Rehabilitation Application Incident,’ known as the Legoland incident, in 2022. The exact scale of PF contingent liabilities as of the end of last year will only be clearly understood when the business report is released in April this year.

Lotte Construction cited the swift operation of various TFs for financial management and response as the reason for the debt reduction. The asset stabilization TF, which operated from March to the end of last year, contributed to improving financial stability by reviewing the feasibility of major projects and promoting restructuring. Although the TF ended in the second half of last year, related departments continue to carry out financial structure improvement work regularly. Prior to this, from 2018 to 2022, a settlement improvement TF was operated. This organization expedited construction cost settlements, ensured transparency in the settlement process, and reduced delays in construction cost payments.

Industry insiders believe that accelerating apartment sales was key to reducing Lotte Construction’s contingent liabilities. By advancing permits and approvals in redevelopment and reconstruction projects and hastening groundbreaking, the company focused on converting bridge loans into main PF loans, which played a significant role in extinguishing urgent financial fires. Main PF loans are a stage where financial institutions provide stable loans after early groundbreaking and sales prove profitability. In this process, uncertain debt (bridge loans) is converted into loans with guaranteed profitability, thereby strengthening funding stability. A Lotte Construction official said, "The most effective way to reduce contingent liabilities is early groundbreaking and sales," adding, "We sold 13,082 housing units in Seoul and the metropolitan area in 2023, compared to 17,439 units last year."

With a high housing business sales ratio of 50%, Lotte Construction suffered more from the economic downturn compared to other construction companies that also handle plant and civil engineering projects, resulting in relatively high contingent liabilities. A Lotte Construction official stated, "With the reduction of contingent liabilities, refinancing has become smoother, improving the company’s risk management capabilities," and added, "These changes are also positively affecting the overall atmosphere stabilization."

Lotte Group’s full support also had a significant impact on debt reduction. Lotte Group helped secure liquidity for Lotte Construction by creating a real estate PF purchase fund worth 2.3 trillion won in cooperation with major banks.

◆ Financial Sector: "Still Difficult" = However, despite these multifaceted efforts, the market expects this year’s situation to be different. Lotte Group itself is facing increased financial burdens. Due to recent poor performance in the distribution and chemical sectors, Lotte Group is pushing for intensive restructuring, including divesting non-core businesses and asset sales. Shin Dong-bin, Chairman of Lotte Group, recently urged bold restructuring at the Lotte Value Creation Meeting (VCM), stating, "If we do not reform and innovate now, we cannot survive."

Raw material prices continue to rise steadily, and the local sales market shows clear signs of prolonged stagnation. An executive from a commercial bank participating in the Lotte Construction real estate PF purchase fund said, "Some of the PF loans related to Lotte Construction have been converted to main PF loans, but many projects remain, requiring additional restructuring work."

Another official said, "The financial sector is discussing participation in syndicated loans to accept the projects being sold by construction companies," but added, "Since the consent of all participating institutions is necessary and the projects for sale are likely not to be high quality, careful review is planned."