[Edaily Marketin Reporter LEE GEON-EOM ] LOTTE CHEMICAL CORPORATION(011170)continues its precarious balancing act. This is because the company is barely staying afloat by raising funds through corporate bonds backed by bank guarantees, even at the cost of massive fee losses. On the surface, it appears to be putting out immediate fires under the umbrella of its top credit rating (AAA), but in reality, its financial soundness has been so severely compromised that it has had to seek waivers for breaches of its financial covenants. In particular, market concerns are expected to persist, as contingent liabilities in the trillions could materialize if its credit rating is downgraded below ‘A+’.

According to the financial investment industry on the 16th, LOTTE CHEMICAL CORPORATION plans to conduct a book-building process on the 23rd for the issuance of 200 billion won in guaranteed bonds. These bonds will be issued with the highest credit rating of “AAA” backed by bank guarantees, which is three notches higher than LOTTE CHEMICAL CORPORATION’s current standalone credit rating of “AA-.”

LOTTE CHEMICAL CORPORATION’s decision to issue corporate bonds backed by guarantees stems from its unstable standalone creditworthiness. Analysts suggest this move was driven by the recent downgrade of its credit rating outlook to “negative,” making it difficult to secure demand for standard corporate bonds based on its standalone credit alone. A negative credit rating outlook indicates a high likelihood of a credit rating downgrade within the medium term.

The deepening financial uncertainty lies at the root of LOTTE CHEMICAL CORPORATION’s reliance on bank guarantees during the corporate bond issuance process. In fact, while LOTTE CHEMICAL CORPORATION posted an operating profit of 73.4 billion won in the first quarter of this year, its cash flow from operating activities recorded a net outflow of 646.3 billion won due to factors such as a sharp increase in accounts receivable and the settlement of accounts payable. Interest expenses alone reached 132.0 billion won during the same period, indicating a continuing structural challenge where profits generated from operations are insufficient to cover even the rising financial costs.

The downward trend in liquidity indicators is also evident. As of the end of the first quarter, cash and cash equivalents—including short-term financial instruments—stood at 2.1892 trillion won, down 18.8% from 2.6948 trillion won at the end of the previous year. Conversely, total debt increased by 7.5% during the same period, rising from 9.3994 trillion won to 10.1082 trillion won.

Consequently, net debt—which reflects the actual debt burden—rose by 18.1% from 6.7046 trillion won to 7.9190 trillion won, and the net debt-to-total-capital ratio climbed by 5.7 percentage points from 38% to 43.7%. The debt dependency ratio also rose to 31.7%, exceeding the generally accepted appropriate level of 30%.

In particular, short-term debt (including short-term corporate bonds) due within one year surged from 4.4423 trillion won to 5.0893 trillion won during the same period, accounting for 50.3% of total debt. This indicates that exposure to refinancing risk has expanded significantly in a short period.

Given this situation, the potential uncertainty surrounding LOTTE CHEMICAL CORPORATION’s debt is gradually increasing. Despite successfully returning to an operating profit in the first quarter of this year, LOTTE CHEMICAL CORPORATION is failing to meet the financial covenants (such as a debt-to-equity ratio of 400% or less and an interest coverage ratio of 5x or more) it agreed to as the parent company in connection with the acquisition financing for LOTTE ENERGY MATERIALS CORPORATION (690 billion won) and the borrowings of its Indonesian subsidiary (2.4 billion dollars). Although the company has avoided an event of default (EOD) by securing a waiver from its lending syndicate to postpone compliance with these covenants until 2027, concerns remain.

Market concerns are focused on the possibility that the company’s financial situation could deteriorate further, causing its actual credit rating to drop from the current “AA-” to “A0” or lower (below “A+”). While there is no immediate problem until the rating is downgraded by one notch to “A+,” if it is further downgraded to “A0,” all early settlement triggers under the 1.3 trillion won Price Return Swap (PRS) contract—backed by equity stakes in its U.S. and Indonesian subsidiaries—will be fully activated. Furthermore, under the Indonesian project financing (PF) guarantee agreement, a new obligation to provide first-priority mortgages on major domestic plants would follow, potentially blocking access to key assets that could be used for additional financing.

Another concern is the burden felt by the creditor group regarding LOTTE CHEMICAL CORPORATION’s financial risks. Some observers interpret that the reason the creditor group chose to defer enforcement of the agreement rather than declare a loss of the benefit of the term was likely due to the significant impact of their substantial credit exposure tied to the Indonesian subsidiary and LOTTE ENERGY MATERIALS CORPORATION. This is because if the creditor group were to proceed with preemptive principal recovery, the financial burden it would have to shoulder—such as setting aside large provisions for loan losses—would be considerable.

There are also varying perspectives on the collateral assets secured by the creditor group as safeguards. Although mortgage liens worth trillions of won have been established on iconic key properties—including Lotte World Tower—as part of this guaranteed bond issuance, some observers point out that, given the nature of super-tall commercial buildings, it may not be easy to liquidate them quickly in an emergency. This is why concerns are being raised that concentrating credit support from the creditor group on specific companies could increase uncertainty in the long term.

Meanwhile, LOTTE CHEMICAL CORPORATION also issued 300 billion won worth of three-year corporate bonds secured by Lotte World Tower last April. At that time as well, Shinhan, Kookmin, Hana, and WOORIRO CO., LTD provided payment guarantees, allowing the bonds to be issued with the highest credit rating of “AAA.” Last year, LOTTE CHEMICAL CORPORATION paid 18.8 billion won in guarantee fees as compensation for the credit enhancement.