Fitch Affirms and Withdraws Lotte Shopping's Ratings
05/11/2019 09:00
(The following statement was released by the rating agency) Fitch Ratings-Seoul-November 05: Fitch Ratings has affirmed Lotte Shopping Co. Ltd's 'BBB-' Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured debt rating. The Outlook is Negative. At the same time, Fitch has chosen to withdraw the ratings for commercial reasons. The Negative Outlook reflects the pressure on Lotte's credit profile from lagging profitability in its domestic hypermarket, supermarket and electronics retail operations, and higher debt from stake acquisitions in various affiliates. As a result, we expect net leverage (adjusted net debt/EBITDAR) to remain above our negative sensitivity of 5.0x in the next two to three years. The rating remains supported by a dominant position in Korea's department store industry and a diversified business portfolio that encompasses major retail formats. Key Rating Drivers Hypermarket and Supermarket Losses: Lotte's total revenue fell slightly in 2018, but operating profit was down by 26% due to losses in its domestic hypermarket and supermarket operations and costs related to the closing of three Chinese department stores. Revenue and profitability rebounded in 1H19, with robust domestic department store and overseas hypermarket operations. However, losses in hypermarkets and supermarkets and profit deterioration in Lotte Hi-mart (an electronics retail store chain) continued to pressure profitability. Uncertain Recovery Outlook: We expect full-year revenue and profit to improve in 2019, reflecting a robust contribution from the department store segment, continued positive contributions from overseas hypermarket operations, and the addition of the Inchon department store through the stake acquisition in Lotte Inchon Development from the parent, Lotte Holdings. However, recovery prospects for the struggling domestic hypermarket and supermarket divisions remain uncertain due to sluggish demand and ongoing restructuring. Credit Profile Under Pressure: Lotte's net leverage ratio remained above our negative guideline of 5.0x in 2018, and we expect net leverage to remain at around 5.3x in 2019-2020 due to the struggling domestic hypermarket and supermarket segments - and also with higher debt from the recent consolidation of three subsidiaries in which Lotte acquired stakes from its parent as part of group restructuring; net debt increased by KRW1.3 trillion and the cash paid was KRW398 billion. Lotte also acquired 20% of Lotte Card Co., Ltd. for KRW325 billion in October 2019 after the Lotte Group sold its stake to a private equity fund. Asset Sale and REIT IPO: We believe Lotte's credit profile is somewhat supported by ongoing asset sales and the proceeds from the recent Lotte REIT IPO. Lotte has so far raised over KRW500 billion in cash over the year through the sale of its Chinese mart operations, two domestic department stores, and domestic hypermarket assets. Another KRW410 billion was raised through the IPO of its fully owned Lotte REIT, which owns six department stores and four hypermarket assets. Lotte floated half of its stake in October. Derivation Summary Lotte is well positioned within the APAC retail universe against China's Golden Eagle Retail Group Limited (BB/Stable) and Hong Kong's Lifestyle International Holdings Limited (BB+/Stable), with its larger scale and stronger and more diversified market presence in various retail formats. It has a weaker financial profile, but we believe the gap in its business profile justifies the rating differential. Lotte's financial profile is weaker than that of US investment-grade peers, such as Macy's Inc. (BBB/Stable), Kohl's Corporation (BBB/Stable) and Nordstrom, Inc. (BBB+/Negative), which justifies the rating differential. However, its similar size and better diversified business profile mitigate the weaker financial profile. We also believe Lotte's interest coverage ratio - which is weaker than that of peers - is partly offset by the substantial rental income it receives, which has consistently been above the rental expense amount. Key Assumptions - 2019 revenue and profit to improve from 2018; EBITDA to improve by around 10% - Capex (net of contracted sales proceeds from project companies) of KRW283 billion in 2019, KRW1.1 trillion-1.3 trillion a year in 2020-2021 - Moderate dividend growth RATING SENSITIVITIES Rating sensitivities are no longer relevant as the ratings have been withdrawn Liquidity and Debt Structure Adequate Liquidity: Lotte's total reported debt was KRW8.9 trillion as of June 2019. Of that amount, KRW2.4 trillion was short-term debt, compared with cash and equivalents of KRW2.3 trillion. We believe liquidity is further supported by access to various funding sources and banking relationships, as it is a major affiliate of the Lotte Group. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Lotte Shopping Co. Ltd; Long Term Issuer Default Rating; Affirmed; BBB-; RO:Neg ; Long Term Issuer Default Rating; Withdrawn; WD ----senior unsecured; Long Term Rating; Affirmed; BBB- ----senior unsecured; Long Term Rating; Withdrawn; WD Contacts: Primary Rating Analyst Jeong Min Pak, Senior Director +822 3278 8360 Fitch Australia Pty Ltd, Korea Branch 9F Kyobo Securities Building 97 Uisadang-daero, Youngdeungpo-gu Seoul 07327 Secondary Rating Analyst Shelley Jang, Director +822 3278 8370 Committee Chairperson Kalai Pillay, Managing Director +65 6796 7221 Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Hybrids Treatment and Notching Criteria (pub. 09 Nov 2018) https://www.fitchratings.com/site/re/10051058 Corporate Rating Criteria (pub. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) https://www.fitchratings.com/site/re/10090792 Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019) https://www.fitchratings.com/site/re/10058988 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10100422 Solicitation Status https://www.fitchratings.com/site/pr/10100422#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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