Lotte Chemical's rating outlook cut on worsening financials

South Korea’s No. 2 petrochemicals maker Lotte Chemical Corp. has taken a hit from a lowered credit-rating outlook of the company and its major affiliates stemming from a worsening financial condition amid high crude oil prices and a prolonged slowdown of the global petrochemical industry.

On Thursday, Korea Ratings said it downgraded the outlook for the holding company and five units of Lotte Group, the country’s No. 6 conglomerate, from stable to negative.

The firms with a lowered outlook are holding company Lotte Corp. with AA-, Lotte Chemical with AA, financial services unit Lotte Capital Co. with AA-, auto loan unit Lotte Auto Lease Co. with AA-, real estate firm Lotte Property & Development with AA- and car leasing company Lotte Rental Co. with AA-.

Lotte Chemical’s downgrade stemmed from its persistent operating losses amid a prolonged industry downturn and its growing financial burden from large investments, Korea Ratings said.

The industry slowdown has continued due to high crude oil prices and sluggish global demand, the rating agency added.

The outlook downgrade on Lotte Chemical, Lotte Group’s major subsidiary, has reduced the possibility of the company’s support for other affiliates in dire financial straits, Korea Ratings noted.

Lotte Chemical has posted a series of operating losses. It logged a deficit of 92.4 billion won ($67 million) in the first quarter of this year.

The firm posted a 347.7 billion won operating loss last year, following a 762.6 billion won shortfall in 2022.

Lotte Chemical has bet on some big deals in recent years, including a 5 trillion won investment in an Indonesian petrochemical project and the acquisition of Iljin Materials for 2.7 trillion won in 2022, which has become Lotte Energy Materials Co.

The petrochemical firm’s net borrowing on a consolidated basis surged to 6.4 trillion won as of the end of March, more than 21 times the amount at the end of 2021.

The company will secure new proceeds by selling equities of its poorly rated affiliates, Korea Ratings said in a report. Investors should consider its continuing financial burden from investments, including the Lotte Chemical Indonesia New Ethylene (LINE) project in Indonesia, the report added.

The rating agency said it will take a while before Lotte Chemical earns profits through a business restructuring that entails a shift of its focus from petrochemicals to copper foil and hydrogen.

As some 70% of the firm’s revenue comes from the sale of basic chemicals such as polymers and monomers, it will take time to strengthen the business diversification to a meaningful level, Korea Ratings said.

Lotte Chemical could see lower-than-expected profitability in the copper foil business continue due to sluggish electric vehicle demand and intensifying competition from Chinese players, according to the rating agency's forecast. 

Write to Hyun-Ju Jang at blacksea@hankyung.com
Jihyun Kim edited this article.