The three major credit rating agencies in South Korea expressed concerns about Lotte Engineering & Construction's financial soundness, emphasizing the risks associated with project financing (PF) contingent liabilities across the construction industry.
According to the financial industry on the 16th, Korea Credit Ratings noted in a report released earlier this month that contingent liabilities from PF could materialize depending on the developments related to the Homeplus situation. Lotte Engineering & Construction's PF guarantees related to Homeplus stores amount to about 600 billion won. Homeplus confirmed the closure of nine stores before filing for corporate rehabilitation in March. Recently, it also notified the termination of contracts for 17 stores where the rent negotiations broke down.
Lotte Engineering & Construction generally has a large PF scale for contract projects. As of the end of last year, the total was 3.2 trillion won, making it the second largest after Hyundai E&C, which has 5.6 trillion won. However, Hyundai E&C has sufficient cash assets, resulting in a lower risk. Moreover, Lotte Engineering & Construction's ratio of contingent liabilities to its equity is at a more serious level (111%) compared to Hyundai E&C (80.6%).
While Lotte Engineering & Construction's PF in contract projects reached 5.7 trillion won in 2022, it significantly reduced that amount due to support from its affiliates. However, the scale of unstarted PF amounts to 2.2 trillion won, indicating a financial burden, according to Korea Credit Ratings. They stated, "While the scale of PF guarantees has decreased, there remains a financial burden due to uncertainties in cash collection from unstarted PF and poorly performing project sites."
NICE Investors Service also assessed at the end of last month that there is a risk that contingent liabilities from Lotte Engineering & Construction's PF could materialize. NICE Investors Service analyzed that the scale of contingent liabilities from the 'unstarted and low occupancy rate contract business sites' held by Lotte Engineering & Construction amounts to 2.4 trillion won. They added, "Uncertainties in projects and risks of realization of PF contingent liabilities persist, especially in regional business sites."
Korea Ratings stated at a risk assessment seminar for construction companies in February that Lotte Engineering & Construction has increased financial burdens due to large-scale fundraising, raising downward pressure on its credit rating. In March, when refinancing was needed, Lotte Engineering & Construction established a fund of 2.3 trillion won with four major banks, including the four largest commercial banks and Industrial Bank of Korea, KB Securities, Daishin Securities, and Kiwoom Securities, overcoming the crisis.
These credit rating agencies have diagnosed that the possibility of materialization of PF contingent liabilities remains high not only for Lotte Engineering & Construction but for the entire construction industry. They analyzed that 46% of the PF guarantees held by construction companies are assessed to be at a 'high' risk level or above.