Lotte Group's Domestic and Overseas Affiliates Raise Large-Scale Funds in Securitization Market

Securing Funds Successively for Overseas Development Projects, US Hotels, Korea Seven
Trillions Invested but Performance Slumps Increase Debt Repayment Burden
Ongoing Financial Support Burden for Affiliates like Hotel Lotte

Several struggling affiliates of Lotte Group are consecutively securing funds in the securitization market with support from the parent company. This is because their financial conditions have worsened as loan maturities approach, making it difficult to raise funds independently without support from financially sound affiliates. The burden of affiliate support on higher-tier companies in the governance structure, such as Hotel Lotte and Lotte Holdings, is gradually increasing.

Overseas Affiliates’ Loan Refinancing: Chinese Urban Development and U.S. Hotels

Lotte City Development Project Site in Shenyang, China

According to the investment banking (IB) industry on the 26th, Lotte Property Shenyang recently secured a $263 million (approximately 350 billion KRW) foreign currency loan with Shinhan Investment Corp. and Kiwoom Securities as lead managers. A special purpose company (SPC) lent funds to Lotte Property Shenyang, and the SPC issued securitized bonds to investors using the loan principal and interest as underlying assets to raise the loan funds.

In this process, Hotel Lotte supported Lotte Shenyang’s fundraising by providing a liquidity support agreement to the SPC. If Lotte Shenyang fails to repay the loan properly, Hotel Lotte has contracted with the SPC to provide the necessary funds for loan repayment. Thanks to Hotel Lotte’s side support, Lotte Shenyang was able to secure the funds needed to repay maturing loans.

Lotte Property Shenyang is a developer established in Hong Kong by Lotte Group to carry out a large-scale urban development project in Shenyang, China. Although it borrowed trillions of won for this mega development project with high hopes, construction was halted and project resumption became difficult after the deployment of the Terminal High Altitude Area Defense (THAAD) system on the Korean Peninsula, leaving the project in a prolonged state of limbo.

Pressure to repay loans continues, and attempts to sell land and the project have failed. Meanwhile, the maturity of a $208 million foreign currency loan borrowed three years ago is approaching soon. Additionally, it is known that other large loan maturities are sequentially coming due.

Lotte Hotel New York Palace, established by Hotel Lotte to acquire and operate the New York Palace Hotel, recently received a $60 million (approximately 80 billion KRW) foreign currency loan from an SPC created under the lead management of Shinhan Investment Corp. and Kiwoom Securities. The funding was raised through a securitization structure similar to that of Lotte Shenyang, with Hotel Lotte providing a liquidity support agreement to the SPC.

Lotte Hotel New York Palace has continuously raised funds using this method. In December last year, it secured liquidity of $89 million (approximately 110 billion KRW) through the same securitization method under the lead management of KB Securities.

An IB industry insider said, "As the Chinese real estate market has collapsed, the likelihood of normalizing the Shenyang project has become slim, and although overseas hotel businesses have somewhat improved their performance after the COVID-19 endemic phase, the debt burden remains significant. The securitization-based fundraising of overseas affiliates with large-scale investments is expected to continue for some time."

Lotte Culture and Korea Seven Utilize Securitization Market Amid Large Debt Burdens

Lotte Culture, which operates movie theater screening and management businesses, recently issued 200 billion KRW worth of perpetual bonds (hybrid capital securities) with Meritz Securities as the lead manager. The SPC fully subscribed to the perpetual bonds and then issued securitized bonds using the principal and interest of the perpetual bonds as underlying assets. The parent company, Lotte Shopping, provided credit support by agreeing to assist the SPC with loan repayment funds.

Korea Seven, Lotte Group’s convenience store operator, also issued 50 billion KRW worth of private bonds to an SPC. The SPC issued securitized bonds using these private bonds as underlying assets. The lead manager, Korea Investment & Securities, provided credit support such as liquidity support and private bond purchase commitments to the SPC. If Korea Seven fails to properly repay the private bonds, Korea Investment & Securities will support the SPC with funds needed to repay the securitized bonds or assume the debt.

Lotte Culture issued large-scale perpetual bonds to reduce its debt ratio, which has exceeded 3000%. Although perpetual bonds are effectively loans, they are accounted for as equity, thereby improving the financial structure. Korea Seven’s financial burden increased significantly after investing heavily in the acquisition of Ministop in 2022. Since the acquisition, poor performance has continued, and the financial situation has not improved.

An IB industry insider explained, "These companies have consecutively raised funds through securitization with support from affiliates or lead managers because they find it difficult to raise funds independently due to business difficulties. As Lotte Construction’s financial condition deteriorates, the burden of financial support from affiliates higher in the group’s governance structure, such as Lotte Holdings and Hotel Lotte, is increasing."

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