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| Lotte Chemical's research institute in Daejeon / Courtesy of Lotte Chemical |
By Park Jae-hyuk
Lotte Chemical is facing growing concerns over the possibility of suffering financial risks, due to loans extended recently to the group's construction unit, Lotte E&C, according to industry officials, Friday.
Lotte E&C said late Thursday that it signed a contract with Lotte Chemical to borrow 500 billion won ($348 million) at an annual interest rate of 6.39 percent, on the condition of repaying the principal and interest before Jan. 18 next year.
Their contract came a few days after the petrochemical firm decided on Tuesday to acquire the builder's newly issued shares worth 200 billion won.
"The moneylending contract is a preemptive measure for our stable financial structure, amid concerns over the rising raw material prices and the slump in the real estate market," Lotte E&C said in a press release.
KOSPI-listed Lotte Chemical's stock price plunged after the announcements of the two deals, because some investors regard the contracts as proof that Lotte E&C is on the verge of bankruptcy.
Earlier this week, a rumor spread among securities industry officials that Lotte E&C is facing difficulties in repaying its debts for project financing and that the difficulties caused a setback in the fundraising of its financial affiliate, Lotte Capital. Some investors therefore feared that Lotte E&C's liquidity crisis could have a negative impact on Lotte Chemical.
Both Lotte E&C and Lotte Capital denied the rumor, warning rumormongers about legal action. The Financial Supervisory Service also launched a crackdown over rumors regarding possible bankruptcies of local builders and financial firms.
"We have maintained the optimum level of liquidity and have increased our cash reserve continuously since the beginning of the interest rate hike last year," Lotte Capital said in a statement.
Even before Lotte Chemical lent money to Lotte E&C, domestic credit rating agencies have warned of lowering the chemical firm's credit rating, since it decided earlier this month to acquire a controlling 53.3-percent stake in Iljin Materials, Korea's No. 2 copper foil manufacturer, for 2.7 trillion won.
The price has been considered excessive, given that the market capitalization of Iljin Materials was 2.6 trillion won at the time of the decision.
In addition, multiple securities analysts estimate Lotte Chemical's third-quarter operating loss at around 200 billion won and expect the chemical firm to suffer another operating loss during the fourth quarter. The company started turning a loss during the second quarter, due to the rising raw material prices and falling demand.
"Because Lotte Chemical is a key subsidiary of Lotte Corp., a downgrade of Lotte Chemical's credit rating may have a negative impact on credit ratings of Lotte Corp.'s other affiliates," NICE Investors Service said in a report.
Last year, Lotte Chemical's sales became larger than the revenues of Lotte Group's retail units for the first time in the conglomerate's history.
Lotte Group Chairman Shin Dong-bin has focused on nurturing the chemical firm as the group's cash cow. His oldest son, Shin Yoo-yeol, who is also known as Satoshi Shigemitsu, also joined Lotte Chemical's Japanese office earlier this year as an executive.
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