'Distribution Giant' Lotte Shopping Faces Risk of Downgrade to 'Speculative Grade' Credit Rating

[Asia Economy Reporter Koh Hyung-kwang] Lotte Shopping, the No. 1 distribution company in South Korea, is at risk of being downgraded to a speculative grade in its global credit rating. This is largely due to continuous deterioration in performance caused by economic sluggishness and intensified competition with the online market.

According to industry sources on the 22nd, global credit rating agency Moody's changed the outlook of Lotte Shopping's credit rating (Baa3) from 'stable' to 'negative' the day before. Baa3 is the lowest among the 10 investment-grade ratings. One level below is a speculative grade, meaning Lotte Shopping could soon be pushed into speculative grade territory.

Moody's warned of a possible credit rating downgrade as profitability is unlikely to recover in the short term, and the spread of the novel coronavirus disease (COVID-19) is expected to have an inevitably negative impact on the business environment. Lotte Shopping's consolidated operating profit last year was 428 billion KRW, a sharp 28% decline compared to the same period the previous year. Due to the reflection of large-scale impairment losses, it posted a net loss of 854 billion KRW.

The decrease in sales due to changes in consumer patterns, price competition both online and offline, and store restructuring had a significant impact. As the performance of its core businesses?large discount stores, supermarkets, and the electronics specialty store Hi-Mart?worsened, the same-store sales growth rate in the domestic department store sector fell to minus 1.4%, and large discount stores dropped to minus 6%.

As profitability deteriorated, financial burdens increased. Lotte Shopping's adjusted net debt stood at 6.3 trillion KRW at the end of last year, increasing by more than 1 trillion KRW compared to the previous year. Moody's estimated that the ratio of adjusted net debt to EBITDA for Lotte Shopping last year rose to 6.1 times from 4.6 times the previous year.

Moody's pointed out that Lotte Shopping could be relatively more affected by the spread of COVID-19. Moody's explained, "Although Lotte Shopping announced plans for large-scale store restructuring, the uncertainty regarding the intensity and timing has not been reflected in the credit rating evaluation," adding, "The impact of COVID-19 on the distribution industry could be relatively large, so this should also be taken into consideration."

Furthermore, Moody's warned, "If Lotte Shopping's profitability continues to decline or if the ratio of adjusted net debt to EBITDA exceeds 5.0 to 5.5 times due to large-scale investments, the credit rating will be downgraded."

This content was produced with the assistance of AI translation services.