With the sale of Lotte Rental falling through, Lotte Corporation has begun reexamining funding plans for key affiliates, including Hotel Lotte. The group judged that, because the Lotte Rental sale must restart from scratch, the financial picture that had been arranged on the assumption of closing the sale would 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 agreement to sell equity in Lotte Rental to private equity firm Affinity.
According to the retail industry on the 22nd, upon the termination of the Lotte Rental equity deal, key affiliates including Lotte Corporation and Hotel Lotte reviewed their funding road map and shared response measures. This move follows the Korea Fair Trade Commission's decision to block the business combination, which sent a large merger and acquisition (M&A) that had dragged on for 15 months back to square one.
Until now, Lotte Group managed its coffers on the premise that about 1 trillion won would come in from the sale of 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 assets amounted to only 1.1029 trillion won. Given Hotel Lotte's active support for affiliates such as Lotte Engineering & Construction and Lotte Biologics, the composition has a high share of repayment of short-term borrowings.
In this process, Hotel Lotte has been raising funds since last year by issuing hybrid securities. Thanks to a structure that allows the maturity to be extended, hybrid securities are recognized as capital in accounting. They have the advantage of raising funds without increasing the liability ratio. Because the interest rate on hybrid securities rises over time, they are usually issued with early redemption in mind.
For the 180 billion won in hybrid securities that Hotel Lotte issued in December last year, the first call option (early redemption) date was set for June 2027, a year and six months later. Considering that five years is typical, the term is short. The initial coupon at issuance was 5.3% per annum, but by June 2027, a year and six months later, the rate jumps to 7.3% per annum. A capital market official said, "It was confidence that they would naturally redeem early before the rate rose into the 7% range, and at that time the Lotte Rental sale still looked certain."
After that, Hotel Lotte continued to issue hybrid securities. A representative example is the 200 billion won issuance in March this year. At that time, Hotel Lotte raised funds at an annual rate of 5.793%. 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 preemptively block risk factors related to financial issues. The group is responding even more nimbly ahead of credit rating agencies' regular reviews in June. Internally, it is tightening household finances and highlighting Lotte Rental's competitiveness. Communication emphasizing financial stability to the Yeouido financial sector has also increased compared with the past.
A Lotte Group official said, "After Ko Jeong-wook, a veteran of 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 to closely monitor affiliate performance and funding, and this team is proactively communicating with credit rating agencies and investment banks."