Korea Ratings Downgrades Lotte Engineering & Construction's Credit Rating

On June 18, Korea Ratings announced that it has downgraded Lotte Engineering & Construction's unsecured bond credit rating from 'A+/Negative' to 'A/Stable', and its commercial paper and short-term bond credit ratings from 'A2+' to 'A2'.

Korea Ratings identified one of the reasons for the downgrade as Lotte Engineering & Construction's continued burden of project financing (PF) contingent liabilities, despite reducing the scale of PF guarantees. As of the end of March this year, the company’s consolidated PF guarantees (including joint guarantees, debt assumptions, and liquidity support) stood at 3.6 trillion won (including 500 billion won for redevelopment projects). This means that the company continues to face a heavy PF contingent liability burden relative to its equity capital and available liquidity. Korea Ratings stated, "A significant portion of the PF guarantees for contract projects are for sites that have not yet commenced construction," and added, "For PF guarantees related to projects in provincial areas, the outskirts of the Seoul metropolitan area, and Homeplus development projects, the possibility cannot be ruled out that these may translate into actual loss burdens for the company."

Declining pre-sale performance and weakened profit-generating capacity are also cited as reasons for the downgrade. Korea Ratings noted, "Some residential projects, such as those in Gwangju and Uijeongbu, which began pre-sales last year after converting existing non-commenced PF sites to main PF, have shown sluggish pre-sale results," and assessed, "Given the company's high dependence on the housing sector, if the domestic housing market downturn persists for an extended period, the negative impact could be magnified due to delayed recovery of construction costs and increased inventory burdens."

Korea Ratings further explained that financial volatility stemming from group affiliates and overall financial market conditions also played a role. The agency stated, "Due to the recent expansion of housing supply and the impact of large-scale post-sale redevelopment projects that have already commenced construction, accounts receivable have continued to increase, while advance payments have decreased, resulting in a renewed expansion of external borrowings." Korea Ratings emphasized, "As of the end of March this year, consolidated net borrowings stood at 1.7 trillion won, due to factors such as capital injections into the Shenyang subsidiary in China, increased working capital, and higher loans. Although the company’s debt ratio showed some improvement in 2023 and 2024, it still remains around 200%."

The agency added, "Lotte Engineering & Construction is working to secure cash by selling its own assets," but also explained, "If concerns about the poor performance and financial burdens of the group’s core affiliates are not resolved, or if the unfavorable funding environment for construction companies continues, the refinancing and repayment burden for PF asset-backed securities and corporate bonds could increase."