[Funding] Lotte Mulsan Raises 350 Billion Won for Repayment of Japanese Financial Institution Loans and More

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[Asia Economy Reporter Lim Jeong-su] Lotte Corporation, a subsidiary of Japan’s Lotte Holdings, is raising up to 300 billion KRW through corporate bonds and loan securitization. This is to repay high-interest loans borrowed from Japanese banks such as Mizuho Bank and to secure operating funds. There are concerns that the company’s performance and financial condition may deteriorate due to the worsening commercial real estate market caused by the COVID-19 pandemic.

According to the investment banking (IB) industry on the 31st, Lotte Corporation raised 150 billion KRW through loan securitization on the same day. The loan maturity is three years, and early repayment before maturity is not allowed. Shinhan Bank led the fundraising. While executing the loan through a special purpose company (SPC), Lotte Corporation issued short-term bonds with a three-month maturity based on the principal and interest of the loan repaid by Lotte Corporation to secure loan funds.

The short-term bonds issued by the SPC will be refinanced 12 times over three years with a three-month maturity until the final loan maturity. In the refinancing process, if there are insufficient investors, Shinhan Bank has provided a purchase agreement to buy the short-term bonds on behalf of investors. Additionally, if the SPC lacks funds to repay the short-term bonds, liquidity will be supplied up to a limit of 400 million KRW.

Lotte Corporation will also issue public corporate bonds worth up to 200 billion KRW. Initially, it plans to issue 70 billion KRW of three-year maturity bonds and 40 billion KRW of five-year maturity bonds, with the possibility of increasing the amount up to 200 billion KRW depending on demand forecasts. NH Investment & Securities, Korea Investment & Securities, KB Securities, and Samsung Securities are jointly acting as lead managers.

Lotte Corporation plans to use the raised funds to repay borrowings from Japanese financial institutions such as Mizuho Bank. During the development of projects like Lotte Tower and Lotte World Mall in Jamsil, Seoul, Lotte Corporation borrowed funds from Japanese financial companies such as Mizuho Bank and Mitsui Sumitomo Bank. The interest rates on these borrowings are in the high 2% range, and with recent domestic interest rate declines, refinancing at lower costs has become possible. The funds will also be used for operating expenses.

As COVID-19 prolongs, the outlook for Lotte Group, which has a high offline retail proportion, is worsening. Lotte Corporation, which is engaged in real estate sales and leasing, is no exception. It participated in the development of Lotte World Tower and Lotte World Mall and currently conducts sales and leasing operations for these buildings. Lotte Group affiliates occupy stores and offices in these buildings.

Performance until the first half of the year was relatively good. Sales in the first half of this year were 217.2 billion KRW, an increase of 39.5 billion KRW compared to the same period last year. Operating losses were 6.5 billion KRW, with the deficit reduced to about half. However, due to economic downturn and weakened consumer sentiment, overall demand for commercial real estate leasing is sluggish, and with supply increasing, rental prices are falling and vacancy rates rising, leading to expectations of profitability decline.

The financial structure has also deteriorated again over the past two years. Lotte Corporation secured 974.2 billion KRW by selling some shares of Lotte Chemical and purchasing shares of Lotte Asset Development, reducing net borrowings from over 1.9 trillion KRW at the end of 2018 to 996.8 billion KRW. Last year, due to changes in lease accounting, 559.4 billion KRW of financial leases were recognized as borrowings, increasing net borrowings to 1.3945 trillion KRW. Recently, a paid-in capital reduction of about 5% caused a cash outflow of 170 billion KRW, pushing net borrowings back up to around 1.5 trillion KRW.

An IB industry official said, "Although borrowings can be repaid by selling affiliate shares, the company has not been able to reduce borrowings with internally generated funds due to prolonged losses," adding, "Performance and financial condition volatility may increase depending on future sales and leasing income."

Meanwhile, Lotte Corporation currently holds a 60.10% stake as the largest shareholder of Japan’s Lotte Holdings. Recently, the stake of Japan’s L No.3 Investment Company increased from 4.98% to 5.25%, and Hotel Lotte’s stake rose from 31.13% to 32.83%. The shareholding of Shin Dong-bin, Chairman of Lotte Group, also increased from 0.01% to 1.82%.

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