Homeplus, Lotte Shopping, and Other Retailers Face Increased Financing Burden Due to Credit Rating Downgrades

[Asia Economy Reporter Park Jihwan] Recently, as the credit ratings of major retail distributors such as Lotte Shopping and Homeplus have clearly declined, it is predicted that their financing burdens will increase. The offline retail industry as a whole has faced profitability deterioration due to the rapid growth of the online shopping market amid COVID-19, and corporate bond interest rates have nearly doubled in the past year, increasing interest expenses.

According to the credit rating industry on the 25th, Korea Ratings and Korea Investors Service downgraded Lotte Shopping’s unsecured bond credit rating from AA to AA- on the 21st. Earlier, on the 16th, NICE Investors Service also lowered Lotte Shopping’s long-term credit rating from AA to AA-. Homeplus faced the risk of its credit rating falling from A- to the BBB level after Korea Ratings downgraded its rating outlook from stable to negative the day before.

The common reason credit rating agencies view retail companies negatively is prolonged poor performance combined with weak financial soundness. Lotte Shopping recorded sales of 15.5811 trillion KRW last year, down 3.7% from the previous year, and operating profit decreased by 37.7% to 215.6 billion KRW.

Choi Hanseung, a researcher at Korea Ratings, said, "Competition in the retail industry is intensifying due to changes in consumer patterns, and the business advantages Lotte Shopping had, such as a large store network, are being diluted, so the expanded customer attraction cost burden is not expected to ease." He analyzed, "Although the good profitability of the department store and home appliance distribution sectors offsets the poor performance of discount stores and supermarkets and the large deficits of e-commerce and Culture Works, if the turnaround in the underperforming business divisions does not occur, meaningful profitability recovery in the medium to short term will be difficult."

Homeplus also recorded sales of 5.2847 trillion KRW from March to November last year, down 6.1% compared to the same period the previous year. During the same period, operating profit turned from a 38.7 billion KRW surplus to an 83 billion KRW deficit.

As the credit rating decline trend among retail companies becomes clear, the future financing environment is also expected to be challenging. Moreover, the recent corporate bond market has shrunk due to the early tightening moves by the U.S. Federal Reserve (Fed) and the geopolitical risks between Russia and Ukraine. Corporate bond interest rates have nearly doubled compared to last year, significantly increasing interest burdens. As of mid-month, the average interest cost of domestic high-grade corporate bonds (AA grade or higher) is 2.8%, more than double the level of one year ago (around 1.3%).

Lotte Shopping must repay a total of 440 billion KRW in bonds by the first half of this year. The immediate burden is the 240 billion KRW 7-year bond (interest rate 2.45%) maturing next month. Additionally, there are 50 billion KRW 7-year bonds (2.64%) and 150 billion KRW 5-year bonds (2.50%) waiting. A bond industry official said, "Even when the corporate bond market was good, Lotte Shopping was avoided by investors due to concerns about business stability, and now that the overall market is worse, issuing bonds seems difficult." He added, "Issuance might only be somewhat feasible if done as ESG bonds like last year."

In the case of Homeplus, the refinancing amount maturing within one year is relatively small at about 145 billion KRW, but the problem will worsen if an additional credit rating downgrade materializes. Homeplus used a rating trigger to increase repayment feasibility when raising 400 billion KRW by transferring lease deposit refund claims. If the credit rating falls further, there is a risk of early repayment of securitized borrowings of about 400 billion KRW. The condition allows creditors to demand early repayment if the long-term credit rating falls below BBB- or the short-term credit rating falls below A3-. Currently, Homeplus’s long- and short-term credit ratings are A- and A2-, respectively, and the trigger will activate if they fall three levels further.

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