As the Korea Fair Trade Commission blocked the sale of Lotte Rental, attention is focusing on Hotel Lotte's liability and its support for affiliates. If Lotte Rental were sold to a private equity fund, about 1 trillion won was expected to flow into Hotel Lotte. With a large capital inflow in mind, Hotel Lotte has actively provided financial support to Lotte E&C and Lotte Global Logistics.
According to the retail industry on the 29th, Hotel Lotte has effectively served as a solid financial backer for Lotte Group over the past few years. Korea Ratings said that as of the end of the third quarter last year, Hotel Lotte provided a 150 billion won subordinated loan to Lotte E&C's securitization special-purpose company. It also pledged to back more than 1 trillion won in interest funding for Project Charlotte. Project Charlotte is a joint fund of more than 2 trillion won formed to purchase Lotte E&C's project financing (PF) asset-backed securities nearing maturity to ease short-term burdens.
It did not support only Lotte E&C. When the listing withdrawal of Lotte Group's logistics affiliate Lotte Global Logistics led financial investors (FI) to decide to exercise a put option (sell right), Lotte Corporation and Hotel Lotte agreed to absorb this put option. Hotel Lotte contributed about 80 billion won for this. It also invested more than 200 billion won in Lotte Biologics, touted as Lotte Group's new growth engine.
To undertake such support, Hotel Lotte has been working hard to earn money while taking on borrowings. At a board meeting in mid-Dec. last year, Hotel Lotte set this year's bond issuance limit at 1.5 trillion won, and on the 21st conducted bookbuilding for a 100 billion won public offering bond. It also issued hybrid capital securities. Hybrid capital securities are hybrid securities with characteristics of both stocks and bonds, and they are recognized as capital, not liability, in accounting.
An interesting point is the issuance terms of Hotel Lotte's hybrid capital securities. The securities were issued at an annual coupon of 5.3%, with the rate set to rise by 2.0 percentage points starting in June 2027. After that, interest is added by 0.5 percentage point each year. The structure allows the rate to rise to as high as 8.8%.
Given these issuance terms, Hotel Lotte and Lotte Group are presumed not to have anticipated that the sale of Lotte Rental would be disallowed. They were issued with a very short step-up structure. A step-up structure is designed so that the interest rate is automatically increased after a certain period following issuance. Because the purpose is to raise capital at a low initial rate to lower the debt ratio and improve the financial structure, it is customary to redeem at the point when the interest rate rises. For this reason, the rate is usually structured to rise only about five years later, but unlike others, Hotel Lotte set the rate to rise after a year and a half. Investment banking industry officials said this appears to be a structure set up on the expectation that a large amount of capital would flow in during that period.
Credit rating agencies currently rate Hotel Lotte at AA-. However, officials at the rating agencies said Hotel Lotte's reliance on borrowings is on par with corporations at the BBB level in practice. As of the end of the third quarter last year, Hotel Lotte's total borrowings were in the 8.3 trillion won range, of which short-term borrowings with maturities of less than one year were in the 4.5 trillion won range. The ratio is slightly over 50%, while the appropriate share of short-term borrowings is generally viewed at around 50%.
Lee Juwon, an analyst at Korea Ratings, noted in a report, "There is an investment burden from affiliates, but the borrowing burden can be controlled based on asset sales." However, as the major financing deal of selling Lotte Rental did not proceed as expected, Hotel Lotte and Lotte Group have been forced into a situation where they must move quickly.
A Hotel Lotte official said, "We secured 250 billion won by selling L7 Hongdae and are reviewing the sale of noncore assets in various ways." Lotte Group also said, "We own a total of 53 trillion won in real estate assets, including quality assets that can be securitized, and have secured about 13 trillion won in cash equivalents," focusing on preventing the rejection of the Lotte Rental sale from spreading into rumors of a groupwide liquidity crisis.
There is also a sympathetic view of Hotel Lotte's situation. That is because the Korea Fair Trade Commission's decision to block the sale of Lotte Rental appears to reflect a negative view of private equity funds. In rejecting the sale of equity in Lotte Rental, the Korea Fair Trade Commission cited the point that "given the nature of private equity funds aiming for a sale after a certain period, it is difficult to guarantee the permanence of behavioral measures such as price increase restrictions."
A retail industry official said, "For 10 years since 2015, the world has not been easy for Lotte Group," adding, "We did not think the sale of Lotte Rental would be disallowed, and it would have been difficult for Lotte Group to foresee this."