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| Lotte Group Chairman Shin Dong-bin, left, and Lotte E&C CEO Ha Suk-joo / Courtesy of Lotte Group |
By Park Jae-hyuk
Lotte Group's affiliates poured a combined 1 trillion won ($733 million) over the past three weeks into the group's construction unit, which has faced financial risks stemming from worsening investor sentiment amid interest rate hikes and a default in project financing for the construction of the Legoland Korea Resort in Gangwon Province.
Concerns have therefore grown further over the possibility of the builder's liquidity crisis threatening Lotte's group-wide financial soundness.
Lotte E&C, a subsidiary of Lotte Chemical, said in Tuesday's regulatory filing that it agreed to sign a contract on Wednesday with the petrochemical firm's subsidiary, Lotte Fine Chemical, to borrow 300 billion won at an annual interest rate of 7.65 percent, on the condition of repaying the principal and interest before Feb. 8 next year. The size of the debt is larger than 297.6 billion won ― the amount of cash owned by the lender as of September.
"We decided to lend the money for three months for a stable fund management of our affiliate, Lotte E&C," Lotte Fine Chemical said in its regulatory filing.
Their contract was signed three weeks after the construction firm borrowed 500 billion won from its parent at an annual interest rate of 6.39 percent, on the condition of repaying the principal and interest before Jan. 18 next year. In addition, Lotte E&C sold its newly issued shares worth 200 billion won to its three major shareholders ― Lotte Chemical, Hotel Lotte and Lotte Aluminum.
Given that a rumor spread among securities industry officials last month that Lotte E&C was facing difficulties in repaying its debts for project financing, some investors regarded the builder's contracts with its parent as proof that it is on the verge of bankruptcy.
Although Lotte E&C immediately denied the rumor, Korea Investors Service did not rule out potential negative impacts on the builder's fundamentals, in case of its failure in removing uncertainties regarding its debts. The credit ratings agency also pointed out that Lotte Chemical's attempt to support its affiliate could weigh on its credit, cash flow and financial soundness.
"From the perspective of Lotte Group, it is seemingly trying to overcome this short-term difficulty by offering a group-wide support to Lotte E&C," said Korea Research Institute for Construction Policy researcher Lee Eun-hyung. "The group will not give up on the builder, so as to earn money when the construction industry revives in the future."
Lotte Chemical has already been losing money, due to falling demand in the global market. The company suffered a 423.8 billion won operating loss during the third quarter, failing to make money for two consecutive quarters.
Although Lotte Chemical dismissed concerns over a potential setback in fundraising to complete the acquisition of Iljin Materials which it bought for 2.7 trillion won, Samsung Securities analyst Cho Hyun-ryul expressed skepticism about its plan to borrow 1.7 trillion won within the next five months.
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