이 기사는 2022년 02월 24일 08:10 thebell 에 표출된 기사입니다.

Lotte Shopping’s credit rating has been downgraded by Korea Ratings and Korea Investors Service from AA/Negative to AA-/Stable, meaning higher borrowing costs for the South Korean retailer while its profitability is getting worse.

The rating downgrade, which was announced on Monday, comes after Nice Investors Service cut its credit rating on the company to AA- on February 16.

The local credit rating agencies cited the company’s disappointing earnings as the main reason for the downgrade.

Lotte Shopping reported large losses in 2021, especially from its ecommerce business, despite the retail industry overall benefiting from the so-called revenge spending by consumers seeking to indulge to make up for lost opportunities due to the pandemic.

Revenue fell 3.7% year-on-year to 15.58 trillion won ($13.07 billion) and operating profit plunged 37.7% to 215.6 billion won. While Lotte Shopping blamed the disappointing results on one-time costs related to its restructuring, the credit rating agencies more focused on the downtrend in profitability.

The lower credit rating is expected to further increase Lotte Shopping’s borrowing costs, potentially deteriorating its financial position given weakening cash generation. A total of 440 billion won of the company’s bonds, including 240 billion won in debt that is coming due next month, will mature in the first half of this year.

Lotte Shopping repaid 270 billion won in debt that matured early this year by using cash on hand and the proceeds from its bond offering last spring. In April 2021, it raised 225 billion won by selling bonds with 5-year and 10-year maturities at yields of 2.13% and 2.95% respectively.

The company could also use cash reserves this time, but refinancing some of its debt looks unavoidable due to its weakening cash position.

The spreads of ‘AA-‘-rated corporate bonds have continued to widen in recent months despite the increase in the government bond yields, with the average spread of 3-year ‘AA-‘-rated corporate bonds rising from 35 basis points in April last year to 60 basis points earlier this week. The 3-year government bond yield rose from 1.14% to 2.36% in the same period.

The company freed up cash in the past two years after selling non-core assets, including its stake in Lotte World Tower, which helped reduce its net borrowings. But its adjusted net borrowings are still above 11 trillion won, or more than 7.5 times earnings before interest, taxes, depreciation and amortization (EBITDA), on a consolidated basis at the end of 2021 due to continued investments in new business opportunities.

“I don’t think Lotte Shipping will have difficulties refinancing debt because the credit downgrade had been widely expected, but its rating cut, combined with rate hikes, means a much heavier interest burden for the company” said an official at one credit rating agency in Seoul. “We will closely watch its efforts to improve operational efficiency and the performance of its ecommerce business.” (Reporting by Geul-ah Bang)