[Corporate Financing] Lotte Shopping Provides Financial Support to Lotte Incheon Development... Increased Borrowing Burden

900 Billion Loan and Credit Provision
E-commerce and COVID-19 Adversities Overlap
Losses Widen for 4 Years, Borrowings Triple
Additional Credit Rating Downgrade Warning

Lotte Department Store Incheon Terminal Branch

[Asia Economy Reporter Lim Jeong-su] Lotte Shopping has supported the funding of its subsidiary, Lotte Incheon Development. Amid increasing performance declines due to market penetration by e-commerce companies and the COVID-19 pandemic, the burden of subsidiary borrowings, including contingent liabilities, continues to expand. This is also putting pressure on credit ratings.

According to the investment banking (IB) industry on the 26th, Lotte Incheon Development received a loan of 90 billion KRW from a special purpose company (SPC) established under the management of KB Securities. The loan is to be repaid in a lump sum after one year. The SPC raised loan funds by issuing asset-backed commercial papers based on the principal and interest repaid by Lotte Incheon Development. Lotte Shopping has agreed to provide liquidity support to the SPC if there is a shortage of funds for loan repayment.

Last year, Lotte Shopping acquired 13.5 million shares (67.5%) of Lotte Incheon Development held by Lotte Mulsan. As a result, Lotte Incheon Development became a 100% subsidiary of Lotte Shopping. Currently, Lotte Incheon Development operates a leasing business for the Incheon General Terminal site and buildings located at 15 Gwanggyo-dong, Nam-gu, Incheon Metropolitan City.

Lotte Shopping previously acquired shares of Lotte Songdo Shopping Town from Lotte Station and also acquired shares of Lotte Incheon Town held by Lotte Holdings. The shareholding ratio in these subsidiaries is 100%. During the share acquisition process, Lotte Shopping additionally took on 2.2 trillion KRW in borrowings held by newly affiliated subsidiaries such as Lotte Incheon Development and Lotte Incheon Town.

Lotte Shopping's performance has deteriorated due to weakening customer base amid the expansion of the e-commerce market, while the burden of borrowings continues to grow. Due to poor performance of domestic and overseas affiliates, net losses rapidly increased to -20.6 billion KRW in 2017, -465 billion KRW in 2018, and -840.1 billion KRW in 2019. A large-scale deficit is also expected in the first half of this year due to the impact of COVID-19, leaving the company unable to escape four consecutive years of worsening performance.

Along with poor performance, the financial situation has worsened as funds necessary for operating capital and other purposes were raised. On a consolidated basis, net borrowings increased from 5.09 trillion KRW at the end of 2018 to 16.3 trillion KRW in the first quarter of this year. This is more than a threefold increase in one year.

Credit ratings have also deteriorated. Credit rating agencies have assigned a 'negative' outlook to Lotte Shopping's credit rating (AA). Less than a year after the credit rating was downgraded from AA+ to AA last year, warnings of further downgrades have emerged. If financial improvements are not made, the credit rating is expected to fall to AA- soon.

An IB industry official said, "Although the integrated online shopping mall 'Lotte On' is quickly compensating for the sluggish offline stores such as department stores and marts, the e-commerce market itself is a loss-making competition, so it does not significantly help profitability," adding, "There is a need to improve finances through measures such as selling idle real estate."

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