Graphics by Bae So-young

Lotte Group has recently been combating speculative rumors suggesting that Korea's sixth-largest conglomerate may face a serious financial crisis soon. The group is expressing its confidence in its cashable assets, but market anxiety is growing because the group is simultaneously striving to secure liquidity through various measures.

According to industry sources, Thursday, Lotte Shopping recently selected Cushman & Wakefield as one of the lead managers for the sale of Lotte Department Store Centum City in Busan, and at least four firms, including asset management firms and developers, have participated in the bidding.

Along with the Busan store, Lotte Shopping already shut down its store in Masan, South Gyeongsang Province, in June, and a number of other stores with sluggish sales are reportedly under review for possible sales.

On Nov. 20, Lotte Rental, Korea's top car rental business, said in its regulatory filing that its largest shareholders — Hotel Lotte and Busan Lotte Hotel — have been proposed to sell their stakes in Lotte Rental, but no specific decisions have been made.

Despite the explanations, industry officials said the sale is picking up momentum, with some reports saying that the company has already selected UBS as a lead manager. The stakes, approximately 60 percent, are valued at 1 trillion won ($717.88 million).

Army helicopters pass by Lotte World Tower in Songpa District, Seoul in this Sept. 3 photo. Yonhap

Speculation is also growing that the group may consider selling its financial unit, Lotte Capital. While Lotte Group has sold most of its financial affiliates, including credit card and insurance units, during its restructuring in 2017, Lotte Capital has remained under the umbrella despite its strategic shift away from the financial industry.

Against this backdrop, Lotte Group said on Wednesday that it has offered its key asset, Lotte World Tower, as collateral to banks to strengthen the creditworthiness of corporate bonds issued by its struggling chemical unit, Lotte Chemical.

Though the group stated that the decision was made to reassure investors of its financial prudence, market anxiety is growing over whether the group is actually facing a crisis.

Lotte Chemical plant in Louisiana / Courtesy of Lotte Chemical

Where it all began

Lotte Group has been combating rumors that first spread through YouTube, with claims that the group will declare a moratorium next month and will be disbanded. When such rumors circulated on Nov. 18, the group's holding company, Lotte Corp., saw its share price drop 6.59 percent, while Lotte Chemical experienced a sharper decline of 10.22 percent.

Given Lotte Group's explanation that it now holds 139 trillion won of assets, including 15.4 trillion won of cash and 56 trillion won of real estate property, industry officials mostly said the rumors are unrealistic.

However, the current status of the group's two flagship businesses — retail and chemical — is stoking concerns that underlying risks may exist, prompting the group to prepare for potential impacts.

Triggering those concerns is Lotte Chemical's fiscal status. Lotte Chemical revealed last week that it was in a position where creditors could declare an event of default and demand early repayment of its corporate bonds, valued at 2.05 trillion won. An event of default refers to a circumstance that allows creditors to demand full repayment before the bonds' maturity, when the bond issuer fails to keep predetermined agreements.

The agreement attached to the bonds required Lotte Chemical to maintain a certain level of profitability compared to interest expenses, but the company failed to keep it in the third quarter of this year because its operating profits plunged despite snowballing debts.

Lotte Chemical, once the group's cash cow with annual operating profits exceeding 1 trillion won from 2015 to 2019, has seen a sharp decline in earnings due to intensified competition with Chinese rivals. The company reported an operating loss of 608.1 billion won in 2022, 212.1 billion won in 2023 and 660 billion won in the January-to-September period of this year.

Despite the declining earnings, the company expanded its expenses during the period, investing 5.2 trillion won in building a massive petrochemical industrial complex in Indonesia and 2.7 trillion won to acquire Iljin Energy Materials, which is now Lotte Energy Materials.

“The company's bond agreement seems unusual, but assumed to be based on the company's robust profitability in the past,” Samsung Securities Analyst Cho Hyun-ryul said. “The recent sharp decline in profits and expanded investments have resulted in the breach of the agreement. Without these investments, the company would have maintained a net cash position.”

Lotte Department Store in Myeongdong, Seoul / Courtesy of Lotte Shopping

The group's other flagship business, retail, is also facing similar risks.

According to Lotte Shopping's financial report, the company's outstanding corporate bonds amounted to 2.6 trillion won as of September, and those bonds are also attached with agreements on keeping the company's debt ratio below 400 percent. Of those bonds, 450 billion won are required to keep the debt ratio below 200 percent.

Lotte Shopping kept its debt ratio at 155 percent in the third quarter, only 2 percentage points up from a year earlier. The company's operating profit has shown an uptrend in recent years, growing from 207.6 billion won in 2021 to 508.4 billion won last year.

However, the company is set to make sizable investments. Last month, Lotte Shopping unveiled its plan to invest 7 trillion won by 2030 in the shopping mall business. At the time, Lotte Department Store CEO Jung Jun-ho said the company would be able to “secure enough resources within the reasonable debt level,” even though market watchers cast concerns that it may be a risky bet.

This led rating houses to lower their credit outlook on not only those companies but also other Lotte companies. In June, Korea Investors Service lowered its credit outlook on Lotte Property & Development, Lotte Rental and Lotte Capital to negative, citing the slimmer chances of Lotte Group's support on those companies due to Lotte Chemical's weakened creditworthiness.

NICE Investors Service also lowered its outlook on Lotte Corp., the group's holding company, citing “a downward revision of Lotte Chemical's credit outlook” and “the company's elevated financial strain.”

Lotte Chemical President Lee Young-jun, left, and Lotte Corp. Executive Vice President Shin Yoo-yeol

The group on Thursday launched a reshuffle in its executives, replacing 21 CEOs of its affiliates to focus on restoring their competitiveness. This represents 36 percent of the company's CEOs.

Of them, Lotte Chemical Co-CEO and Executive Vice President Lee Young-jun has been promoted to president and CEO, overseeing all of Lotte's chemical businesses, replacing Lee Hun-ki. Along with the top leaders, 10 out of the group's 13 chemical unit CEOs were replaced in Thursday's reshuffle.

Hotel Lotte, which also serves as the group's second holding firm, has made sweeping changes to its unit leadership, replacing all three CEOs of its business divisions — hotel, duty-free and theme park.

Meanwhile, Shin Yoo-yeol, the eldest son of Lotte Group Chairman Shin Dong-bin, has been promoted to executive vice president of Lotte Corp.'s future growth division.