“Credit Checkpoint” is a column that assesses the credit rating risks of companies preparing to issue corporate bonds by examining their financial structure and cash flow. It evaluates a company’s short- and medium-term financial stability by focusing not only on the numbers in the financial statements but also on the quality and sustainability of its cash flow. We highlight key financial indicators and potential risk factors to help corporate bond investors and market participants assess a company’s creditworthiness from a more comprehensive perspective. <Editor’s Note>

[E-Daily Marketin Reporter LEE GEON-EOM ] All eyes are on whether Lotte Corporation(004990)will elicit a favorable response from corporate bond investors, building on its marked return to profitability and improved cash generation in the first half of this year. While concerns remain about sluggish conditions in some core businesses, such as petrochemicals, analysts note that the holding company’s fundamental strength has become significantly more robust.

According to the financial investment industry on the 25th, Lotte Corporation is conducting a bookbuilding process today for the issuance of 80 billion won in corporate bonds. Depending on the results of the bookbuilding, the company plans to increase the issuance amount to up to 150 billion won.

Lotte Corporation previously conducted a bookbuilding process for 150 billion won in corporate bonds last February, receiving a total of 535 billion won in orders. The 2-year bond (targeting 80 billion won) attracted 340 billion won, and the 3-year bond (targeting 70 billion won) attracted 195 billion won, resulting in a highly successful offering that significantly exceeded the target amount.

Interest rates were set at levels higher than the market average. The 2-year bond yielded +4 basis points (bp) relative to the target amount, and 110 billion won in funds participated at +9 bp during the bookbuilding process. The 3-year bond also yielded +5 bp relative to the benchmark rate, with 85 billion won in demand confirmed in the range of up to +7 bp. Despite the strong demand during the bookbuilding process, the fact that the spread widened indicates that credit spreads have not yet fully narrowed.

The market is closely watching whether Lotte Corporation will be able to achieve a negative (-) yield in this bookbuilding. Analysts explain that given the marked improvement in financial indicators—such as a return to profitability in the first half of the year and improved cash flow—the possibility of a spread narrowing is gaining traction. However, investors still cite the size of the company’s debt and the volatility of its core business conditions as key factors to consider.

In fact, Lotte Corporation’s core business profitability showed a clear rebound. Consolidated revenue for the first half of the year reached 7.7152 trillion won, up 1.1% from 7.6284 trillion won in the same period last year. Operating profit rose 9.3% to 175.1 billion won, compared to 160.2 billion won during the same period. Net income stood at 78.8 billion won, marking a successful return to profitability.

Cash generation has also improved noticeably. Cash flow from operating activities (OCF) in the first half totaled 604.2 billion won, a sharp 34.8% increase from 448.1 billion won in the same period last year. This indicates a significant rise in cash inflows into the company, coinciding with the rebound in profitability.

Free cash flow (FCF)—which represents the cash remaining after deducting essential expenditures, such as capital investments, from the cash generated by operating activities—also recorded a net inflow. Lotte Corporation’s FCF for the first half of this year stood at 85.2 billion won, marking a return to a surplus compared to the same period last year. This is seen as the result of both increased OCF and reduced capital expenditures, indicating that the company has secured the financial capacity to generate cash on its own without relying on external funding.

Improvements were also evident in debt management. As of the end of the first half of this year, Lotte Corporation’s total short-term and long-term borrowings and corporate bonds amounted to 8.6462 trillion won, a slight decrease from the end of last year (8.7134 trillion won). The debt-to-equity ratio stood at 139%, a decrease of 5.9 percentage points (p) from 144.9% at the end of the previous year, indicating a further improvement in the company’s financial structure. Cash and cash equivalents totaled 1.2362 trillion won as of the end of the first half, suggesting the company has sufficient capacity to manage short-term liquidity.

However, some analysts note that it is difficult to conclude that the debt burden has been completely resolved. This is because the absolute amount of debt still exceeds 8 trillion won, and its ratio to total assets remains above an appropriate level. As of the end of the first half of this year, Lotte Corporation’s debt-to-asset ratio stood at 36.6%, which is higher than the 30% threshold generally considered the “safe zone” by the credit rating industry. The net debt-to-assets ratio also remains relatively high at 31.3%. Some point out that it is too early to be optimistic about the sustainability of improved performance, as concerns persist regarding sluggish business conditions in certain core sectors, such as petrochemicals.

A corporate bond market official stated, “The return to profitability and improved cash flow are positive factors that could push the spread into negative territory during this bookbuilding process,” but added, “The size of the debt and the uncertainty surrounding the business conditions of core sectors remain risk factors that investors must continue to monitor.”