Shinsegae Chosun Hotel with Poor Business, Credit Rating Outlook Downgraded to 'Negative'

Korea Credit Rating Regular Evaluation
Prolonged COVID-19 Adversity
Five New Leased Hotels Operating Until 2021
Significant Potential Fixed Cost Burden

Aerial view of Grand Josun Jeju Hotel. Photo by Shinsegae Josun Hotel

[Asia Economy Reporter Cha Min-young] As the adverse effects of the novel coronavirus infection (COVID-19) have turned into a long-term variable, Shinsegae Chosun Hotel is facing a double burden of deteriorating financial conditions and a downgrade in its credit rating outlook.

On the 22nd, Korea Ratings announced that through its regular evaluation on the 18th, it changed Shinsegae Chosun Hotel's unsecured private bond credit rating and outlook from 'A-·Stable' to 'A-·Negative.' During the same period, the corporate commercial paper credit rating remained unchanged at 'A2-.' When a credit rating agency changes the rating assigned to a company, the cost of external financing may increase.

The shift in the rating outlook from 'Stable' to 'Negative' was largely due to the demand contraction caused by the spread of COVID-19. It was explained that the impact on the hotel industry is expected to be prolonged beyond initial expectations, making a decline in performance this year inevitable. In particular, the number of confirmed COVID-19 cases continues to rise following the Itaewon club cluster infection incident last month. As of 0:00 on the 22nd, the number of confirmed cases in South Korea was 12,438, an increase of 17 from the previous day.

There is also speculation that even if the business environment normalizes in the future, the overall hotel industry will deteriorate in the post-COVID era. Additionally, the potential burden is expected to increase as the number of newly leased and operated hotels rises to five by 2021, including Grand Chosun Busan, Grand Chosun Jeju, and Four Points Seoul Myeongdong in the second half of this year. The currently leased and operated Four Points Seoul Namsan and L'Escape Hotel must also pay minimum lease fees during the lease contract period.

The effect of short-term liquidity supply has also been diluted. Shinsegae Chosun Hotel raised approximately 99.9 billion KRW through a rights offering to Emart at the end of March. However, the total borrowings of Shinsegae Chosun Hotel at the end of March amounted to 409.8 billion KRW, an increase of about 47.1 billion KRW compared to the end of 2019 (362.7 billion KRW), and in April, the first issuance of hybrid capital securities worth 50 billion KRW matured. As a result, the debt dependency ratio remained at a similar level of 70.8% at the end of April compared to 72.0% at the end of 2019. The debt ratio decreased from 548.6% to 456.7%.

A Korea Ratings official stated, "The unfavorable business environment is expected to continue for the time being, as the impact of COVID-19 is unlikely to be completely resolved even in 2021," adding, "We plan to closely monitor the trend of the COVID-19 situation and the room occupancy rates of major business sites to gauge the potential for further changes in profitability and financial stability."

Meanwhile, Shinsegae Chosun Hotel recorded sales of 208.9 billion KRW on a separate basis in 2019. During the same period, it posted an operating loss of 12.4 billion KRW, with an operating margin of -5.9%. Total borrowings were recorded at 362.7 billion KRW.

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