Lotte Engineering & Construction's office building and land processing plan in Jamwon-dong, Seocho-gu, Seoul, is expected to be released as early as next month. In the construction industry, there is speculation that Lotte Engineering & Construction may sell its headquarters building and land to enhance its cash liquidity. The company's cash generation ability has significantly dropped, with net profit declining to one-tenth of the previous level in just a year.
◆ Results of the consultation expected by the end of July, possibility of being listed on the market
According to the construction industry on the 19th, Lotte Engineering & Construction consulted with Cushman & Wakefield Korea and Samjong KPMG regarding the processing plan for its headquarters building and land at 50-2 Jamwon-dong, Seocho-gu, Seoul. The headquarters is a five-story building with a total floor area of 9,949 square meters. It is adjacent to Shin-sinjeong Station and Jamwon Station on Line 3 of the Seoul subway. The consultation is aimed at finding the most effective processing method among options such as simple sales, sales and lease-back, and development into self-residential facilities. This area is a residential zone with properties such as Raemian Shinbanpo Rio Center, Jamwon Lotte Castle Phase 2, and Hanshin Hueplus Phase 12, which could lead to a change in the purpose of the headquarters building for residential use.
A representative of Lotte Engineering & Construction said, "Consultation results are expected to be available by the end of July," and added, "Once we receive the consultation results, we will quickly decide on the processing plan." A construction industry source noted that "self-development projects take a long time due to permitting, actual construction, sales, and other risks, including the possibility that sales may not proceed properly," and added, "Lotte Engineering & Construction is likely to choose the path of selling the headquarters building and land to secure cash promptly." It is reported that Lotte Engineering & Construction hopes to sell for more than 500 billion won.
◆ Credit rating downgrade, net profit down to one-tenth in a year
Concerns about Lotte Engineering & Construction's financial stability are spreading in the market. On the 18th, three credit rating agencies (Korea Ratings, NICE Investors Service, and Korea Investors Service) downgraded Lotte Engineering & Construction's credit rating for unsecured corporate bonds from 'A+ negative' to 'A stable'. Additionally, the credit ratings for commercial papers and short-term bonds were also downgraded from 'A2+' to 'A2'. This was due to a combination of reasons, including the burden of contingent liabilities from project financing, reduced group support capability, and declining cash generation ability.
According to the Financial Supervisory Service and Korea Ratings, Lotte Engineering & Construction's operating profit for the first quarter of this year (January to March) was 3.759 billion won, which is less than one-tenth of last year's first quarter profit of 39.856 billion won. During the same period, the operating profit margin plummeted from 2.1% to 0.2%. The debt ratio, which was 196.0% at the end of last year, rose again above 200% to 205.8% in the first quarter.
What concerns the market more is the decreasing likelihood of support from the group's core affiliates. During the liquidity crisis triggered by the Legoland incident in the fourth quarter of 2022, Lotte Engineering & Construction solved the crisis by directly borrowing 500 billion won from LOTTE Chemical and 300 billion won from LOTTE Fine Chemical. Afterwards, as well, the company issued bonds worth 200 billion won (due in February 2024) with a payment guarantee from LOTTE Chemical. However, the performance deterioration among major affiliates, including LOTTE Chemical, continues, making it difficult to support Lotte Engineering & Construction. In fact, a corporate bond issuance worth 150 billion won was unsuccessful in demand forecasting without a payment guarantee from LOTTE Chemical last July, and was issued at the maximum interest rates proposed by the company (120 billion won at 5.6% and 30 billion won at 5.8%). There is a difference of over 1 percentage point in interest rates compared to the issuance that had a payment guarantee from LOTTE Chemical five months ago.
A bond market official said, "Lotte Engineering & Construction may issue short-term commercial papers, but it appears to be difficult to issue corporate bonds based on its own creditworthiness" and added, "Unless they offer significantly high-interest rates to redeem existing volumes, it will be challenging to secure funding."
Kim Sang-soo, chief analyst at Korea Ratings, stated, "LOTTE Chemical does not have the capacity to support construction," and indicated that "considering the market's unfriendly view of investments involving the Lotte Group and the declining likelihood of support from affiliates, it is necessary to reevaluate Lotte Engineering & Construction's creditworthiness."