Korean firms at risk of credit rating downgrade on Legoland woes

South Korean companies are at risk of credit rating downgrades as the fallout of a debt default by the domestic developer of a Legoland theme park rattled the country’s money markets, undermining their financial stability.

Their credit ratings are expected to be lowered next year as they have already been facing bearish economic factors such as rising interest rates and a ballooning trade deficit.

Korea Investors Service, an affiliate of Moody’s Investors Service, said on Thursday it revised the outlook to negative from stable for a potential cut in the AA+ rating of Lotte Chemical’s non-guaranteed debt.

Lotte Chemical Corp., a major South Korean petrochemical manufacturer, has been suffering from rising costs of raw materials such as naphtha due to higher oil prices with its operating losses soaring to 423.9 billion won ($321.4 million) in the third quarter from 21.4 billion won in the second.

INVESTMENT, RESCUE MEASURE

The company’s financial structure deteriorated as it resumed a $3.9 billion petrochemical project in Indonesia and decided to acquire major South Korean battery material maker Iljin Materials Co. at some 2.7 trillion won.

In addition, Lotte Chemical provided a loan of 500 billion won to a construction affiliate last month in the aftermath of the debt default by the Legoland Korea developer.

Lotte Chemical’s debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio, a key measurement for a firm’s ability to pay off its incurred debt, surged to 4.3 times in the first half of this year from 1.5 times in 2021, indicating the company’s debt load became heavier.

Korea Investors Service also revised the outlook to negative from stable on the AA rating of the non-guaranteed debt issued by Lotte Corp., the holding company of the country’s fifth-largest conglomerate.

LOTTE NOT ALONE

In September, a special purpose company established by the Gangwon Jungdo Development (GJC) to fund the construction of the resort, missed the debt payment, hammering the country’s money markets. It was then finally listed as bankrupt.

Lotte’s affiliates were not the only victims of the default. Credit ratings of other major companies such as SK Hynix Inc., Hanwha Life Insurance Co., Netmarble Corp. and Hanon Systems were already cut.

Domestic credit rating agencies put some 20 companies on their watchlists for potential rating downgrades. Risks of rating cuts of life insurers also grew due to the recent turmoil in the local bond markets by a small player.

Heungkuk Life Insurance Co. said on Nov. 7 that it will buy back dollar perpetual bonds as scheduled, reversing its earlier decision not to exercise an option to call back $500 million in the notes, hitting a further blow to the domestic market.

Write to Ye-Jin Jun and Hyun-Ju Jang at ace@hankyung.com
Jongwoo Cheon edited this article.