Lotte Tour Development Struggles with 700 Billion Won 'Refinancing'

Maturing on November 30... First-tier financial sector reattempt
Possibility of profit in the second half... "It's a matter of time"
Liquidity concerns even if refinancing succeeds
"Can we keep up with Paradise's refinancing?"

As hotel and casino companies that endured difficult times due to COVID-19 are reducing their refinancing burdens in the second half of the year, attention is focused on whether Lotte Tour Development can also alleviate its refinancing concerns. Currently, Lotte Tour Development is pursuing refinancing for the 700 billion KRW loan (maturing this November) borrowed to build the 'Jeju Dream Tower' integrated resort.

According to Lotte Tour Development on the 3rd, the 700 billion KRW borrowed from Korea Investment & Securities and 56 other financial institutions is approaching maturity on November 30. In November 2020, Lotte Tour Development borrowed 600 billion KRW (interest rate 4.05%) and 100 billion KRW (5.9%) respectively from multiple financial institutions to construct 'Dream Tower,' the largest integrated resort in Jeju Island, and the maturity is due in the second half of this year.

Refinancing refers to raising funds again to repay borrowed money. Lotte Tour Development plans to succeed in refinancing by forming a lending consortium mainly composed of first-tier financial institutions (commercial banks), rather than extending the maturity with existing financial institutions.

Refinancing is the biggest challenge Lotte Tour Development faces this year. In the audit report released last April, our accounting firm pointed out that the 700 billion KRW short-term debt (maturing within one year) could increase going-concern uncertainty. At that time, as market concerns grew, Lotte Tour Development unusually announced that it was pursuing refinancing with first-tier financial institutions for the said funds.

In the case of Paradise, which operates similarly, refinancing was completed in June for 730 billion KRW maturing in December. They secured 500 billion KRW in loans from six first-tier financial institutions (commercial banks), raised 100 billion KRW through a paid-in capital increase, and repaid the remaining 130 billion KRW with surplus profits. Previously, Paradise raised development costs through the joint venture Paradise Segasami to build Paradise City, a foreigner casino and hotel complex in Yeongjongdo, Incheon.

The reason refinancing at Lotte Tour Development is somewhat delayed can be attributed to performance. While Paradise has maintained profitability since the third quarter of last year, Lotte Tour Development recorded annual losses in 2019, 2020, 2021, and 2022, and posted an operating loss of 33.4 billion KRW in the first quarter of this year. Paradise's performance improved significantly due to actively attracting Japanese tourists through subsidiaries and the effect of China's reopening. In contrast, Lotte Tour Development did not fully benefit from the demand surge following China's reopening.

For performance to improve, Chinese tourists need to arrive in Jeju and use casinos or hotels, but with fewer flights, the number of Chinese tourists visiting Jeju is less than half compared to before COVID-19. There is inevitably a significant difference between the number of tourists visiting Incheon and those visiting Jeju. Although Chinese tourists have surged sharply this year, the period when this will be fully reflected in performance is expected to be the second half of the year. Lotte Tour Development's expected sales and operating loss for the second quarter are 74.6 billion KRW and 11.3 billion KRW respectively, with operating loss expected to decrease by about 20 billion KRW compared to the previous quarter.

Although a turnaround has not yet been reflected in numbers, investment industry insiders view the possibility of Lotte Tour Development's refinancing failure as low. This is based on the judgment that the number of tourists visiting Jeju is rapidly increasing, making it highly likely to return to profitability from the second half of the year. In fact, as of the 30th of last month, the number of foreign visitors to Jeju was about 87,000, a roughly 440% increase compared to about 16,000 visitors on January 1 this year. Looking at flights arriving in Jeju, there were only 60 flights per week in January this year, but now it has jumped to 100 flights.

A Lotte Tour Development official said, "In 2020, when we had not yet obtained casino licenses, we had no choice but to raise funds from second-tier financial institutions, but now that performance is improving, refinancing will be successfully completed through first-tier financial institutions," adding, "We are actively in contact with commercial banks."

However, even if refinancing succeeds, it will take a long time for concerns about liquidity to disappear. Assuming the company receives senior secured loans from first-tier financial institutions for the 700 billion KRW, the interest rate level expected by the investment industry is in the 6% range. Since 600 billion KRW was previously borrowed at an interest rate in the 4% range, financial costs are inevitably expected to increase. Considering that in September last year, to prevent early redemption of 60 million USD worth of foreign currency convertible bonds (CB), the coupon rate was reluctantly raised from 5% to 15%, the costs to be incurred are expected to increase further.

Na Seung-doo, a researcher at SK Securities, said, "It is difficult for the financial structure to improve immediately, and we need to confirm whether the third-quarter performance will significantly turn around. However, since the casino industry has high leverage, once it starts generating profits, it can improve significantly, so if business goes well throughout 2024, concerns about the financial structure will fade away," he forecasted.

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