With the sale of Lotte Rental falling through, Lotte Corporation has begun a fresh review of major affiliates' fundraising plans, including Hotel Lotte. The decision reflects the view that, because the Lotte Rental sale must restart from scratch, the financial setup built on the premise of closing the sale will inevitably change. On the 18th, Lotte Rental filed a corrected disclosure saying that its largest shareholder, Hotel Lotte, and major shareholder Busan Lotte Hotel had terminated their equity sale agreement with private equity firm Affinity.
According to the retail industry on the 22nd, upon terminating the Lotte Rental equity deal, Lotte Corporation, Hotel Lotte, and other key affiliates met to review the roadmap for their fundraising plans and share response measures. The move follows the Korea Fair Trade Commission's decision to block the business combination, which sent the large-scale merger and acquisition (M&A) effort of 15 months back to square one.
Lotte Group had managed its coffers on the premise that about 1 trillion won would come in from selling Lotte Rental. As of the end of last year, Hotel Lotte's current liabilities were 5.4466 trillion won, of which repayment of short-term borrowings stood at 3.5228 trillion won. Cash-like asset funds were only about 1.1029 trillion won. Given that Hotel Lotte has actively supported affiliates such as Lotte Engineering & Construction and Lotte Biologics, the share of repayment of short-term borrowings is high.
In the process, Hotel Lotte has bolstered funding since last year by issuing hybrid securities. Thanks to a structure that allows maturity extensions, hybrid securities are recognized as capital in accounting terms. They have the advantage of enabling fundraising without increasing the liability ratio. Because interest rates on hybrid securities rise over time, they are usually issued with early redemption in mind.
Of the hybrid securities issued by Hotel Lotte in December last year, the 180 billion won tranche set its first call option (early redemption) date for June 2027, a year and six months later. Considering that the norm is five years, the term is short. The initial coupon at issuance was an annual 5.3%, but by June 2027, a year and six months later, the rate jumps to 7.3%. A capital-markets source said, "It was confidence that they had the capacity to redeem early before the rate rose into the 7% range, and at that time the Lotte Rental sale still looked certain."
Hotel Lotte continued to issue hybrid securities afterward. A representative case was a 200 billion won hybrid issued in March this year. Hotel Lotte raised funds at 5.793% then. The call option (early redemption) date is Sept. 30, 2028, two years and six months later.
With the Lotte Rental sale falling through, Lotte Group has recently moved proactively to head off financial risk factors in advance. In particular, it is reacting more nimbly ahead of credit rating agencies' regular reviews in June. Internally, the group is tightening household finances and highlighting Lotte Rental's competitiveness. Communication emphasizing financial stability to the Yeouido financial sector has increased compared with the past.
A Lotte Group official said, "After Ko Jeong-wook, a veteran within the group, was appointed co-CEO of Lotte Corporation in November last year, we have been managing finances conservatively," adding, "In the organizational reshuffle at the end of last year, we created a financial strategy team that closely monitors affiliates' performance and funding conditions, and this team is taking the lead in actively communicating with credit rating agencies and investment banks."