Nice Credit Rating, Hotel Shilla Credit Rating Outlook Downgraded to 'Negative'

On the 16th, NICE Credit Rating downgraded Hotel Shilla's long-term credit rating outlook from 'Stable' to 'Negative'. The credit rating remained at 'AA-'.

In the report released on the same day, NICE Credit Rating explained that the reason for downgrading Hotel Shilla's rating outlook was "due to the expected delay in recovery of operating profitability caused by the decline in performance in the duty-free sector, and the increased borrowing burden compared to the past due to weakened profit-generating capacity."

The duty-free sector, which accounts for a significant portion of Hotel Shilla's operating profit, recorded an operating loss of 75.7 billion KRW last year due to high exchange rates and economic slowdown originating from China. In particular, the decrease in consumption caused by the economic slowdown in China is identified as a performance obstacle amid the underwhelming number of Chinese group tourists visiting Korea.

Hwang Jong, the lead researcher who authored the report, pointed out, "Due to the poor operating performance of the duty-free sector, the recovery of operating profitability is expected to be delayed." He added, "Although the number of passengers at Incheon Airport has significantly increased with the normalization of international flight supply, the per capita sales at the duty-free shops remain low, which is expected to negatively affect operating profitability in the medium to short term due to the burden of duty-free shop rental fees at Incheon Airport."

Additionally, the increasing borrowing burden was also cited as a concern. Researcher Hwang stated, "The borrowing burden is high relative to profit-generating capacity," and "Considering routine investments, the planned payment of the remaining Incheon Airport lease deposit (approximately 50 billion KRW), and new hotel openings, it is expected to take time to alleviate financial burdens through improved operating performance."

Hotel Shilla's net borrowings amounted to 1.2546 trillion KRW on a consolidated basis at the end of last year, showing an increasing trend since 2022. The ratio of net borrowings to EBITDA also rose significantly from 5.1 times at the end of 2021 and 5.3 times at the end of 2023 to 9.9 times at the end of 2024.

NICE Credit Rating generally considers downgrading the rating when this indicator exceeds 5.5 times or when the possibility of support at the group level decreases. The report also included that if future operating cash flow improves and the burden of new facility investments decreases, resulting in the net borrowings to EBITDA ratio falling below 4.5 times, the possibility of restoring Hotel Shilla's rating outlook to stable could be considered.