“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. We evaluate a company’s short- and medium-term financial stability by focusing not only on the figures in its 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>

[Edaily Marketin Reporter LEE GEON-EOM ] LOTTE rental(089860)While the company is boosting profitability thanks to growing rental revenue, it faces mounting concerns as it finances most of its investment assets through debt. Short-term debt—which must be repaid within one year—alone has surpassed 2.4 trillion won, leading to assessments that repayment pressure is significant. In particular, with the sale to TPG nearing completion and the possibility of early redemption of publicly offered bonds looming, there are calls for urgent action to shift toward a long-term debt structure.

According to the financial investment industry on the 19th, LOTTE rental will conduct a bookbuilding process on the 20th to issue 150 billion won in corporate bonds. The offering will be divided into a 1.5-year tranche of 50 billion won, a 2-year tranche of 80 billion won, and a 3-year tranche of 20 billion won, with plans to increase the total amount to up to 300 billion won depending on the results.

The target yield band has been set at -30 basis points to +30 basis points relative to the individual market average yield. This issuance marks the company’s first public bond offering since TPG began pursuing an acquisition. Earlier this year, the company withdrew its plan to issue public bonds after the sale to Affinity Equity Partners fell through due to intervention by the Fair Trade Commission.

In the corporate bond market, while LOTTE rental’s solid market position is highly regarded, attention is also focused on its debt repayment burden and reliance on short-term borrowing.

LOTTE rental’s performance in the first half of this year was solid. Consolidated revenue reached 1.4967 trillion won, up 4.3% year-over-year, and operating profit rose 16.7% to 168.3 billion won, driven by increased rental revenue. However, the company’s structure makes it difficult to cover vehicle investment costs with profit growth alone.

Expanded Borrowing for Rental Asset Investments… Persistent Free Cash Flow Deficit

Due to the nature of the car rental business, vehicle purchase costs are reflected in cash flow from operating activities. In the first half of this year, the net increase in rental assets was 1.0463 trillion won, up 16.9% year-over-year, while free cash flow (FCF) stood at -142.7 billion won. Although the deficit narrowed compared to the same period last year (-252.5 billion won), the company continues to be unable to fund its investments with internal cash.

As a result, the company had to cover the funding shortfall through external financing, leading to a greater debt burden. LOTTE rental’s total debt rose 7.8% over the past six months, from 4.5315 trillion won at the end of last year to 4.8831 trillion won at the end of the first half of this year. Net debt also increased by 5.3%, from 4.2708 trillion won to 4.4991 trillion won. Consequently, the debt dependency ratio and net debt ratio stood at 60.8% and 287%, respectively. Financial expenses rose by 4.3% year-over-year to 85.9 billion won.

In particular, short-term debt maturing within one year rose 8.8% from the end of last year to 2.4368 trillion won. This represents 49.9% of total debt, an increase of more than 10 percentage points compared to the end of 2023 (39.6%). In contrast, cash and cash equivalents amounted to only 384 billion won, meaning short-term debt is 6.3 times the company’s cash holdings. Even when adding the unused committed credit line of 626.1 billion won in Korean won, the ratio remains at around 41%.
Variable of

Early Redemption of Publicly Offered Bonds… Shorter Maturities Pose a ‘Challenge’

On top of this, the burden has grown due to the variable of

early redemption

of

publicly offered bonds

resulting from a change in major shareholders. With the Fair Trade Commission approving TPG’s acquisition of shares last month, Lotte Group plans to finalize the sale of its 61.2% stake this month. If LOTTE rental leaves the group, claims for early repayment of 961 billion won in public bonds as of the end of June will become possible under the restrictions on changes in corporate control stipulated in the bond underwriting agreement.

The outstanding balance of publicly offered bonds has decreased significantly compared to 1.52 trillion won at the end of the first quarter of last year. However, as the company refinanced these bonds with commercial paper (CP) and short-term bank loans, the average maturity of its debt has actually shortened. In the first half of this year, while the company repaid 540 billion won in bonds, it issued only 156.4 billion won in new bonds.

A large volume of debt is set to mature by July of next year, including 500 billion won in corporate bonds and approximately 630 billion won in commercial paper (CP) and electronic short-term bonds. Some analysts point out that with cash on hand falling significantly short of short-term debt, the burden of refinancing could increase further if early redemption requests are added to the mix.

Park Kwang-sik, a senior researcher at Korea Ratings Corporation, stated in a report, “Considering the cash flows expected from rental assets, the company’s liquidity resilience is excellent,” but added, “However, given the increase in short-term borrowings, it is necessary to extend the maturity profile of the debt.”

He added, “There is a potential for early redemption of publicly offered corporate bonds in the event of a change in corporate governance,” and noted, “It is necessary to monitor the impact of the refinancing scale and interest rates on profitability and financial soundness.”