This article was displayed on the ChosunBiz MoneyMove (MM) site at 3:49 p.m. on May 18, 2026.
It appears that Lotte Chemical has failed to meet key financial covenants in connection with the large acquisition financing it raised for the purchase of Lotte Energy Materials. The company secured a waiver from the lending group at the end of last year for breaches of the covenants, but concerns over financial stability persist as the petrochemical market remains weak and financing costs stay high.
In the industry, with the recovery lagging expectations, there are views that it will be difficult to meet the covenant thresholds in the second quarter as well. A simple swing to profit under the special circumstances of war is not enough to offset the debt burden, and financing costs also remain elevated. The market sees it as difficult to obtain additional waivers if a clear trend of earnings improvement does not emerge.
According to the investment banking (IB) industry on the 18th, Lotte Chemical has covenants related to the Lotte Energy Materials acquisition financing that require it to keep the ratio of net financial debt to EBITDA (earnings before interest, taxes, depreciation and amortization) at 400% or less on a consolidation basis, and to keep the interest coverage ratio, defined as EBITDA to interest expense, at 5 times or more. The current acquisition financing balance is about 690 billion won.
However, both indicators are currently confirmed to be below covenant levels. Lotte Chemical, to address the risk of covenant breaches, entered talks with the lending group last year and secured a waiver of the financial covenants. While this does not immediately trigger an event of default (EOD), the current metrics indicate the company is effectively outside covenant thresholds.
Given actual profitability and debt burden, some say the financial cushion is still insufficient. Lotte Chemical's first-quarter EBITDA is estimated at about 410 billion won. Over the same period, interest expense was about 130 billion won. On a simple comparison, the EBITDA-to-interest expense ratio is around 3 times, below the 5 times covenant threshold.
The ratio of net financial debt to EBITDA also exceeds the threshold. As of the end of the first quarter, net financial debt, considering total borrowings and cash-equivalent assets, is estimated at about 9 trillion won. Compared with a simple annualized EBITDA, the net financial debt/EBITDA ratio works out to the mid-5 times.
That said, compared with last year, there are some signs of improvement in the earnings trend itself. Lotte Chemical returned to profit on a consolidation basis in the first quarter, stepping out of the red for now. This is attributed to stable materials and supplies prices and improved spreads for some products, as well as eased one-off expenses from the previous quarter.
Lotte Energy Materials also appears somewhat more stable than last year, with customer inventory adjustments easing and utilization rates recovering. However, with the electric vehicle market slowing and concerns persisting about a global oversupply of copper foil, some say it will take time for a full recovery in profitability.
The problem is that the financial burden is still accumulating faster than the pace of market improvement. Lotte Chemical is seeing a slower-than-expected recovery in basic chemicals due to oversupply from China, and it continues to face burdens from its investment in the Indonesia petrochemical complex (LC Indonesia) and capacity expansions related to battery materials. This means that even if profitability improves somewhat, it will not be easy to quickly reduce the debt burden.
Even if second-quarter results improve somewhat, it is seen as unlikely that the company can meet the covenants again in the short term. To meet the 5 times threshold for the interest coverage ratio, simple math suggests EBITDA would need to improve by more than 60% from current levels, or financing costs would need to fall sharply through debt reduction. To bring the net financial debt-to-EBITDA ratio down to the 4 times covenant threshold, a reduction in debt burden must also occur.
In particular, the market cites the still-heavy financing cost burden relative to operating profit as a source of concern. As a large portion of earnings continues to flow out as interest expense, the pace of improvement in financial metrics could be limited. The industry expects that if there is no substantive improvement in EBITDA during the current waiver period, negotiating an additional extension may not be easy.