[Korea Ratings Webcast②] "Lotte Group Unlikely to Reduce Debt Burden in Short Term"

On May 8, Korea Ratings Corporation (Korea Ratings) stated that it would be difficult for Lotte Group to reduce its debt burden in the short term due to weakened cash generation capabilities.

Suh Minwoo, Senior Analyst at Korea Ratings, said during a Credit Issue webcast reviewing POSCO, Lotte, SK, and Hanwha Group, "The group's core business, the chemical division, has not been able to escape a prolonged downturn," adding, "The group's crisis situation is recurring due to increased financial burdens arising from business expansion." He made this forecast based on these factors.

Lotte Group's overall profit-generating ability declined last year. This was due to deepening operating losses in the chemical division and worsening profitability in the tourism and leisure sectors. Profitability improvement is also expected to be difficult this year. Analyst Suh said, "Given the severe oversupply in the petrochemical industry and the prolonged slump in domestic consumption, which darkens the outlook for offline demand, it is difficult to expect a clear rebound in the group's overall performance going forward."

He also assessed that investment capital requirements are exceeding operating cash flow, and that net borrowings are increasing, leading to a deterioration of the financial structure. He said, "At the end of last year, the group's net borrowings stood at around 40 trillion won, up about 4 trillion won from the previous year, indicating that the trend of increasing debt burden is continuing. The results of the asset revaluation conducted at the group level last year were reflected in each company's financial statements, improving indicators such as the debt ratio and overall financial soundness. However, this was only a superficial improvement in indicators without actual cash inflows."

In particular, he predicted that it would be difficult to reduce the debt burden in the short term given the deteriorating business environment. He noted that large-scale facility investments have been completed and that additional liquidity could be secured through the sale of equity stakes and non-core businesses. However, he assessed that concerns about a delayed recovery in the group's operating cash generation are even greater.

Korea Ratings analyzes that although Lotte Group has made aggressive investments since 2021, the results have been insufficient. He said, "The combined investment of major affiliates such as Lotte Chemical and Lotte Shopping expanded from about 3 trillion won in 2020 to 6.7 trillion won in 2023, and remained around 5 trillion won last year. As funds have been allocated mainly to the sluggish petrochemical and secondary battery materials sectors, it will be difficult to expect visible investment results for the time being."

Recently, Lotte Group has been accelerating business portfolio restructuring and asset sales to improve its financial structure and strengthen profitability, but he explained that specific results remain to be seen. He said, "A global economic slowdown, sluggish downstream demand, and unstable financial conditions could serve as negative factors in achieving portfolio efficiency. If poor performance in core sectors leads to further deterioration in the group's operating cash generation, it could become a burden in terms of financial flexibility." He added, "Active financial structure improvement is necessary to secure business competitiveness."

Regarding Lotte Chemical, the group's core affiliate, he assessed that there is downward pressure on its credit rating. He said, "Lotte Chemical recorded an operating loss of 894.1 billion won last year, marking three consecutive years of large-scale losses since 2022. Given weak cash generation and interest burdens, it is difficult to immediately reduce the increased debt burden."

He added, "We plan to closely review business structure reorganization, self-rescue measures to enhance financial stability, and related results, and reflect them in future credit evaluations."

Korea Ratings explains that changes in Lotte Chemical's credit rating will also affect Lotte Holdings. In June last year, Korea Ratings changed Lotte Chemical's long-term credit rating outlook to 'negative.' In connection with this, Lotte Holdings' long-term credit rating outlook was also downgraded to 'negative.' He predicted, "Under the current structure, if Lotte Chemical's credit rating is downgraded, Lotte Holdings' credit rating is also highly likely to be downgraded in tandem."