Credit rating agencies concerned about SK, Lotte, CJ finances

[Photo by Kim Ho-young]

Leading domestic credit rating agencies expressed concern in their recent corporate analyses about the financial stresses faced by major South Korean conglomerates, including the SK, Lotte, and CJ groups.

SK Group’s growing debt was highlighted during a webinar organized by Korea Investors Service Inc. on Wednesday. “Monitoring is deemed necessary concerning the group’s financial burdens caused by the ongoing expansion policies, considering the continuing trend of an increase in borrowings for large-scale investment,” the rating agency said.

The group’s total net debt, encompassing all debts in its various businesses such as petrochemicals and batteries led by SK Innovation Co., semiconductors by SK Hynix Co., telecommunications by SK Telecom Co., and energy by SK E&S Co., has surged to 87 trillion won ($65.2 billion) as of the end of March 2023, up from 22 trillion won at the end of 2017, according to Korea Investors Service.

It is noteworthy that the financial burden remains within the group, which generated about 41 trillion won in earnings before interest, taxes, depreciation, and amortization (EBITDA) last year due to continuous large-scale investments in semiconductors and external funding. SK Group’s debt dependency rate was 34 percent, its debt ratio was 112 percent, and long-term borrowing accounted for 64 percent of the total debt as of the end of 2022.

The good news for the group, however, is that the increased debt won’t impact its credit, credit rating agencies noted, although they added that improvement in the group’s chip and battery business performance is more important.

Korea Ratings Corp. also viewed a sway in the group’s rating as unlikely. “SK Group’s credit is likely to remain at the current level given the group’s diversified business portfolio and strong market position in its core businesses, while considering the outlook for gradual improvement in profitability and cash flow after the second half of 2023,” it said.

The agency believes the group’s short- and medium-term credit levels will be largely determined by the level and speed of profitability improvement in the chip and battery sectors, as well as SK’s ability to control financial burdens through cash flow from operations and external funding. Korean Ratings Corp. analysts suggest that the group may need to shift its approach to finance, suggesting a focus on active financial restructuring measures rather than reconsidering its existing active investment approach.

Lotte Group has also received negative comments about its financial structure. The conglomerate is engaged in various businesses, including retail led by Lotte Shopping Co., chemicals by Lotte Chemical Corp., tourism and leisure by Hotel Lotte Co., and food and beverages by Lotte Chilsung Beverage Co.

As of the first quarter of 2023, the group continued to incur losses due to the economic downturn, adding further strain after the previous year’s 762.6 billion won operating loss in Lotte Chemical, a key affiliate of the group. With ongoing investments in the petrochemical complex construction in Indonesia and elsewhere globally, Lotte Chemical’s net borrowing increased from 300 billion won at the end of 2021 to 3.1 trillion won at the end of 2022 and to 3.9 trillion won as of the end of March this year.

However, analysts believe that further credit rating changes are not likely for Lotte Group’s major affiliates. In late June, the three major domestic credit rating agencies—Korea Investors Service, Korea Ratings, and NICE Investors Service Co.—lowered their corporate bond credit ratings for Lotte Group entities to AA with a stable outlook from AA+ with a negative outlook for Lotte Chemical and to AA- with a stable outlook from AA with a negative outlook for Lotte Holdings Co. Analysts explained that the group’s assets worth 128 trillion won and tangible assets worth 51 trillion won, including real estate properties, contributed to its financial stability.

Another conglomerate whose finances are under scrutiny is CJ Group, which operates businesses in areas such as food and biotechnology under CJ Cheiljedang Corp., entertainment and media under CJ ENM Co. and CJ CGV Co., and distribution, logistics, and IT under CJ Logistics Corp. CJ Group’s net borrowing increased to 14.9 trillion won at the end of 2021 and stood at 11.5 trillion won as of the end of March this year.