RPT-Fitch Affirms Lotte at 'BBB+'; Outlook Negative
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Nov 4 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed South Korea-based Lotte Shopping Co. Ltd's (Lotte) Long-Term Foreign Currency Issuer Default Ratings (IDR) and senior unsecured ratings at 'BBB+'. The Outlook is Negative Lotte's ratings reflect its strong market presence in Korea's retail industry and diversified business portfolio. The Negative Outlook reflects recent weakness in operating performance and resulting pressure on its credit metrics, and uncertainty over the recovery in the domestic retail industry.
KEY RATING DRIVERS
Weak operating performance: Lotte's operating performance has been negatively affected in 2012 and H113 by weak consumer demand, the impact of unfavourable regulations, and continued losses in overseas operations. In H113, Lotte posted a 17% growth in revenue and 5% growth in operating profit yoy but the improvement was largely due to the Lotte Hi-mart acquisition, which became effective in November 2012. Without the impact of Lotte Hi-mart, revenue growth would have been nearly flat and operating profit would have fallen by 9% yoy.
Signs of improvement: There are signs of recovery in consumer sentiment, and department store same-store sales growth on a gross revenue basis has been improving on a quarterly basis since Q113 and we expect further improvement in H213. But on a company-wide basis, we expect overall performance to improve more in 2014 once the impact of the new regulations are mostly reflected in the company's operations in 2013.
Unfavourable regulations but reduced uncertainty: The revised "Retail Industry Development Act (Retail Act)", which went into effect in early 2013 to boost the competitiveness of small and traditional retailers, continues to have negative impact on Lotte's operations. The hypermarket segment is the most affected one under the new regulations, which include the implementation of a two-day closure a month and restrictions on new store openings. Given that stores had temporarily gone back to full-time opening in Q412, yoy comparisons are not likely to improve significantly in H213 due to a high base effect. However we believe the uncertainty regarding additional regulations have now been reduced significantly with the passing of the Retail Act and we expect more normalised operations starting in 2014.
Pressure on credit metrics: The recent sluggish operating performance, high investments and increased rental expenses have put further pressure on Lotte's credit metrics. As a result, the company's adjusted net debt/EBITDAR in its non-financial operations rose to 3.8x in 2013 from 2.5x, and is expected to remain at around 4x over the next two to three years, which is above our negative rating guideline of 3.75x. EBITDAR/(interest + rental) is also expected to remain below 3x in the next few years due to rising rental expenses.
Capex still high but flexible: Fitch believes capex (including acquisitions) has peaked in 2012 at KRW3.3trn but still expect it to remain fairly high at KRW1.7-1.9trn levels in 2013-2015. However, the company has emphasised that it has the flexibility to cut capex further for 2014 and 2015 depending on market conditions and has already done so for 2013 capex earlier in the year. Deleveraging efforts: Lotte is also going ahead with various deleveraging measures which include issuance of domestic hybrid bond. Fitch has not factored in the impact of those measures in our rating assumptions as actual execution is subject to market conditions but we believe those measures, if executed, will have a positive impact on the company's balance sheet and net leverage ratio.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
-Adjusted net debt/EBITDAR from non-financial operations exceeding 3.75x on a sustained basis
-EBITDAR/gross interest and rental falling below 2.5x on a sustained basis
Positive: Future developments that may, individually or collectively, lead to positive rating action include
-Adjusted net debt/EBITDAR from non-financial operations falling below 3.75x on a sustained basis
-Sustained recovery in the domestic retail industry