[Funding] Hotel Lotte Issues Additional 110 Billion Won Private Bonds...Continues Debt-Driven Management

[Asia Economy Reporter Lim Jeong-su] Hotel Lotte has issued an additional 110 billion KRW worth of private bonds, pushing its total corporate bond issuance this year beyond 600 billion KRW. Following a sharp decline in duty-free sales due to COVID-19, cash flow has significantly decreased, and the company’s financial condition is worsening as it relies on external borrowing for operating and investment funds.

According to the investment banking (IB) industry on the 17th, Hotel Lotte recently issued private bonds worth 110 billion KRW. The maturity is two years, with an issuance interest rate set at 2.3%. Shinhan Financial Investment, the lead manager, reportedly purchased all the bonds and sold them to institutional investors. The bond issuance rate is somewhat higher than the 1% range for corporate bonds issued in the first half of the year. This is interpreted as reflecting the rise in market interest rates and the downgrade of Hotel Lotte’s credit rating.

Since COVID-19, Hotel Lotte has used private bond issuance as a major means of raising funds. This year, after issuing 300 billion KRW worth of public corporate bonds in January under the management of KB Securities, it has consecutively issued private bonds to raise funds. In February, it issued 100 billion KRW worth of private bonds, and in June and July, it issued 50 billion KRW and 60 billion KRW worth of 15-year maturity bonds privately, respectively.

The balance of commercial paper (CP) also exceeds 1 trillion KRW, standing at 1.05 trillion KRW. At one point this year, the CP balance increased to around 1.3 trillion KRW but then decreased as the company repaid short-term borrowings through asset sales and long-term borrowings. The outstanding corporate bond balance is 3.02 trillion KRW, and marketable borrowings among total borrowings exceed 4 trillion KRW.

Some borrowings include covenants that allow bondholders to declare a loss of benefit of time if certain financial ratios are not maintained. The company must maintain a debt ratio of 150% for borrowings and bonds combined and a general debt ratio of 400% until principal and interest repayment. Additionally, it cannot dispose of assets exceeding 1 trillion KRW per year, nor can it set collateral rights on assets exceeding twice the amount of equity capital.

Due to deteriorating cash flow caused by the downturn in the duty-free business amid COVID-19, Hotel Lotte has no choice but to rely on borrowing to repay maturing debts and fund hotel operations. Hotel Lotte’s sales halved from 7.397 trillion KRW in 2019 to 3.844 trillion KRW last year. EBITDA turned from a 931 billion KRW profit to a 3.7 billion KRW loss during the same period. Although performance is recovering in the second half of this year, it is expected to be difficult to return to previous levels in the short term.

Borrowings, which were below 6 trillion KRW at the end of 2018, have rapidly increased to exceed 9 trillion KRW by the end of the first half of this year. Short-term borrowings and current portion of long-term debt that must be repaid or refinanced within one year amount to 2.7 trillion KRW. Due to consecutive net losses and increased borrowings, the debt ratio has risen to 175%.

The IB industry expects Hotel Lotte to have no choice but to increase external borrowings for the time being. It is difficult to recover cash flow to previous levels in the short term, and in addition to repaying existing borrowings, investment and operating fund needs will increase due to expanded investments in the hotel sector. Due to poor performance, an initial public offering (IPO) is still a distant prospect. A credit rating agency official said, "Although there is a slight improvement in performance centered on the duty-free business recently, the deficit continues, and external borrowings are expected to keep increasing."

Meanwhile, as of the third quarter this year, Hotel Lotte recorded sales of 3.1624 trillion KRW, up 12.4% year-on-year. The operating loss narrowed from 463.2 billion KRW in the third quarter of last year to 247.6 billion KRW this year.

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