Lotte to replace construction unit CEO due to liquidity crisis

Lotte Group will replace the head of its construction unit, hit by a liquidity crisis stemming from project financing, to ease investor concerns over a potential financial crisis at South Korea’s fifth-largest conglomerate.

Lotte Corp., the group’s holding company, and Lotte Engineering & Construction Co. (Lotte E&C) were known to have decided to accept the resignation of the builder’s President and CEO Ha Suk Joo, according to industry sources on Monday.

Ha, who has held the position for almost six years, reportedly expressed his intention to step down to take responsibility for the recent liquidity crunch linked with the PF property. Lotte E&C faced difficulties in the rollover of the to-be-expired property following the fallout of a debt default by the domestic developer of a Legoland theme park.

The conglomerate is understood to consider the appointment of a new head this month, ahead of the group’s regular executive changes in early December. Lotte Corp. Several executives such as Lotte Corp. President Park Hyun-chul, who is responsible for management improvement, were mentioned as candidates.

“It will appoint a new CEO soon as the construction unit needs to repay some 3 trillion won ($2.2 billion) in PF,” said an industry source.

Lotte E&C’s affiliates such as Lotte Chemical Corp. and Lotte Fine Chemical Co. provided some 1 trillion won in loans to save the builder. That hurt those affiliates’ financial structures, cutting their credit ratings.

Lotte Chemical, the construction unit’s largest shareholder, decided on a rights offering for 1.1 trillion won from existing shareholders to secure money for the builder and the acquisition of battery ingredient maker Iljin Materials Co.

MONY DEMAND FROM AFFILIATES

The group needs to inject tens of millions of dollars into Hanssem Co. because of the deteriorating profit of the country’s largest furniture and home furnishing company, which Lotte Shopping Co. acquired with IMM Private Equity last year, industry sources said.

“The fund IMM established for Hanssem pledged to maintain earnings and stock prices above certain levels when it secured acquisition financing from banks and others,” said an investment banking industry source.

“But a tumble in share prices caused problems for a redemption grace period. Lotte must provide additional tens of billions of won as an investor of the fund,” the source said. Lotte Shopping invested 300 billion won as a limited partner for the fund.

Hanssem’s shares closed at 44,750 won on Nov. 21, less than half of the 92,600 won at end-2021, far underperforming an 18.7% drop in the wider Kospi in the same period.

Investment banking industry sources saw possibilities of Lotte Shopping’s tender offer for Hanssem as the country’s top department store operator has a right to buy the stake held by IMM.

“If Lotte sees strong growth potential of Hanssem, it is good to take over its management rights now when stock prices are sluggish,” said another investment banking industry source.

NO GROUP CRISIS

Lotte Group has been trying to assure investors that the liquidity problems of those units will not spread to the whole group.

The conglomerate was estimated to hold some 15 trillion won in cash including cashable assets and short-term financial products as of the end of the third quarter. Its long-term borrowings account for about 70% of its total liabilities.

“Even if we are requested to repay all debts with maturities of one year or less at once, we can cover all with the group’s cash holdings,” said a group official.

Lotte Chemical, the group’s key affiliate, is also expected to improve its earnings.

The major South Korean petrochemical producer said it predicted it would turn to the black in the fourth quarter. It plans to invest a total of 4 trillion won next year, including the 2.7 trillion won takeover of Iljin, the world’s fourth-largest maker of copper foil, a key material for electric vehicle batteries.

Lotte Chemical is considering building a copper foil plant in the US.

Write to Jong-Pil Park and Dong-Hui Park at jp@hankyung.com
Jongwoo Cheon edited this article.