(The following statement was released by the rating agency)
Nov 02 - Fitch Ratings has downgraded South Korea-based Lotte Shopping Co., Ltd.’s (Lotte) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to ‘BBB+’ from ‘A-’ and removed them from Rating Watch Negative (RWN). A Negative Outlook has been assigned.
The downgrade reflects Lotte’s weakened financial profile following the completion of its acquisition of Hi-Mart. In addition, a slowing domestic economy has negatively affected Lotte’s operations so far this year, with EBITDA falling 8% in H112 from the previous year. The Negative Outlook reflects uncertainty over the recovery of the domestic retail market, which could slow improvement in Lotte’s credit profile.
Fitch expects the mostly debt-funded acquisition costing KRW1.25trn to put further pressure on Lotte’s financial profile. Even prior to the acquisition, there had been little headroom at Lotte’s rating level due to rising debt levels from aggressive investments both domestic and overseas. The acquisition would raise Lotte’s adjusted net debt from non-financial operations above KRW10trn at end-2012 from KRW6trn at end-2011. Pro forma adjusted net debt to EBITDAR (including Hi-Mart operations) is expected to rise to 3.8x at end-2012, well above the negative rating guideline of 2.5x.
Fitch expects capex to peak in 2012 at above KRW3trn with the Hi-Mart acquisition before declining gradually in 2013 and 2014. Fitch therefore expects the company to return to positive free cash flow in 2014 and to start showing improvement in its credit metrics.
Furthermore, Fitch expects the acquisition of Hi-Mart, the largest electronic goods retailer in Korea, to generate synergies. The acquisition will likely increase Lotte’s bargaining power with manufacturers, and allow it to tap into Hi-Mart’s extensive customer membership programme. Lotte Card could also increase its share of Hi-Mart’s business.
Fitch expects slight improvement in Lotte’s non-financial operations in H212, reflecting easing regulatory pressure on large retail groups and fewer new store openings. However, there is uncertainty over the timing and extent of a recovery in the domestic retail market.
Y-o-y revenue growth in Lotte’s non-financial operations slowed to 9% in H112 compared with 16% in 2011. With lower revenue growth and new store openings during H1, operating profit fell 19% y-o-y, particularly in the department store division.
What Could Trigger A Rating Action?
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 3.0x 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