[Edaily Marketin, Reporter Lee Geon-eom] Korea Ratings announced on the 12th that it has maintained the credit rating of Lotte Chemical’s unsecured bonds at ‘AA-’ and downgraded the outlook from ‘Stable’ to ‘Negative.’ A negative outlook indicates a high likelihood of a credit rating downgrade in the medium term.

Korea Ratings cited the following as the main factors behind this downgrade of the outlook: △ consecutive operating losses and large net losses since 2022; △ delays in alleviating financial burdens; and △ limited actual financial improvement despite business restructuring.

Kim Ho-seop, a research fellow at HANSHIN, stated “Amid continued poor performance in the basic chemicals sector due to supply constraints originating from China, the company recorded operating losses for four consecutive years as the burden of initial operating costs at the Indonesian LCI subsidiary coincided with widening losses at Lotte Energy Materials,” he explained. “Additionally, non-operating expenses increased due to expanded equity method losses at HD Hyundai Chemical and impairment losses on tangible assets and goodwill, resulting in large net losses for two consecutive years.”

Looking solely at first-quarter performance this year, the company is viewed as having performed well. Driven by rising oil prices due to the U.S.-Iran conflict and positive lagging effects, it recorded an operating profit of 73.5 billion won on a consolidated basis, and profitability is expected to remain solid through the second quarter.

However, Han Shin Rating viewed the prospects for a medium- to long-term recovery in profitability as limited. It assessed that, as China’s large-scale capacity expansion coincides with sluggish downstream demand, improvements in medium- to long-term profitability in key business segments—such as the basic chemicals division—will remain limited.

Research Fellow Kim noted, “Downward pressure on profitability persists, as spreads for major petrochemical products have returned to pre-war levels since May,” adding, “The price pass-through effect seen in the early stages of the war is diminishing, and there is a high likelihood that downstream demand will weaken due to high oil prices and an economic slowdown.”

Positive factors include a reduction in operating losses due to business restructuring and the easing of liquidity burdens following the signing of a structural reform support agreement with creditors. However, Han Shin Rating assesses that the actual reduction in financial burdens will be limited due to factors such as debt guarantees and capital injections for the consolidated entity’s borrowings, as well as the burden of additional capital contributions.

The trend in financial indicators is also concerning. Although consolidated net debt decreased slightly to 6.8409 trillion won at the end of last year due to the sale of non-core assets, it rose again to 8.0631 trillion won as of the end of the first quarter of this year, driven by a combination of factors including a reduction in the balance of securitized purchase cards and temporary cash outflows related to silver catalyst lease deposits. Analysts note that when items with debt-like characteristics—such as the 1.3 trillion won in Price Return Swap (PRS) balances and the 524.3 billion won in purchase card securitization balances—are factored in, the actual financial burden is even higher than the indicators suggest.

Research Fellow Kim stated, “We are facing a situation where weakened operating cash generation is compounded by capital investment requirements related to the Daesan plant restructuring and increased interest burdens.” He added, “Given the uncertainty surrounding the timing and results of further asset efficiency initiatives, it will be difficult to reduce this expanded financial burden in the short term.”