Lotte Engineering & Construction Raises 300 Billion Won Through AAA-Rated ABS Issuance

Development of Industry's First Structured Receivables Product

Reduced Funding Costs Compared to Own 'A0' Credit Rating

"We Expect a Full-Fledged Turnaround in Business Performance This Year"

Lotte Engineering & Construction announced on the 11th that it has raised 300 billion won by issuing asset-backed securities (ABS) with a 'AAA (Triple A)' rating, which is higher than its own credit rating of A0. The ABS issuance was split into two tranches: 150 billion won with a one-year maturity and 150 billion won with a one year and three months maturity. Hana Securities and Shinyoung Securities served as joint lead managers, while Samsung Securities and NH Investment & Securities participated as underwriters.

The underlying assets are accounts receivable for construction payments from several projects where sales have been completed. In effect, the future revenues of projects with stabilized cash flows after the completion of sales were used as collateral. Additionally, Hana Bank provided a 150 billion won credit line, and Lotte Engineering & Construction enhanced credit further through deposit management, enabling the ABS to receive the highest AAA rating. Typically, asset-backed securities can be rated higher than the issuing company's own credit rating due to such credit enhancement structures.

This funding initiative is a preemptive move to address the unique cash flow timing issues inherent in the housing business. In housing projects, construction costs tend to surge just before completion, while the collection of construction payments usually begins in earnest only after completion. Currently, among Lotte Engineering & Construction's ongoing residential projects, 20 are scheduled for completion next year, and the company expects to collect approximately 2.6 trillion won in construction payments after completion.

Since the beginning of the year, Lotte Engineering & Construction has been preparing for the ABS issuance in consultation with credit rating agencies and financial institutions. Starting last month, the company held investor relations (IR) sessions for key financial institutions and institutional investors, providing information on business performance and ABS issuance plans. Lotte Engineering & Construction stated, "Beyond improving our cash flow and reducing funding costs, the company's creditworthiness is being positively reassessed in the capital market," adding, "We are also reviewing additional funding measures, such as issuing commercial paper (CP)." The company plans to diversify its financing methods in the future by issuing more ABS using similar structures, building on the success of this issuance.

Lotte Engineering & Construction's exposure to contingent liabilities from project financing (PF), which had been a major market concern, is on the decline. The company's PF contingent liabilities decreased from around 6.8 trillion won at the end of 2022 to approximately 3.1 trillion won last year. Lotte Engineering & Construction aims to reduce this figure to the low 2 trillion won range this year. Its debt ratio also fell from 265% in 2022 to 235% in 2023, 196% in 2024, and 187% in 2025. Its reliance on borrowings has also decreased from around 40% to the 20% range.

A Lotte Engineering & Construction spokesperson commented, "The successful issuance of AAA-rated ABS marks a significant turning point by gaining market recognition for the company's creditworthiness," adding, "With thorough cash flow management and improvements to our financial structure, we will achieve a full-fledged turnaround in business performance this year."

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