Ratings downgrade possible for highly leveraged retailers

By Choi Sung-jin

Net debt of the nation’s two largest department stores, Lotte and Shinsegae, is approaching 5 trillion won ($4.13 billion) each, showing they need to improve their financial structures urgently, a ratings agency says.

At a seminar at the Federation of Korean Industries Thursday, Korea Investors Service said the growth potential of these large distributors has become poor. In the current situation, such anemic growth also could weaken manufacturers’ price competitiveness and adversely affect their profitability, it said.

“Among retailers, Lotte Shopping and Shinsegae should try to improve their financial structure,” said Park Chun-seong, chief of the corporate assessment team. “If their financial structures remain as they are now, we at the ratings organization cannot help but consider examining their credit ratings negatively.”

As of Sept. 30, the net debt – total debt minus cash deposits – of Lotte Shopping and its overseas corporations was estimated to exceed 5 trillion won. That of E-mart and Shinsegae also amounted to 5 trillion won. “E-mart and Shinsegae are separate corporations but together their business pattern is quite similar to Lotte Shopping’s,” Park said. “Lotte Shopping and Shinsegae are in quite similar situations financially, too.”

In Lotte Shopping’s case, the KIS official said it is necessary to watch closely whether Lotte’s overseas business adds to its financial burden.

“Borrowing by its overseas sector has gradually increased to 1 trillion won or so,” he said. “If its sales growth slows down but debt swells, we cannot help seeing the situation negatively.”

Shinsegae, which plans to invest 700 billion won this year, needs to securitize land and listed stocks available for sale. “Unless the two giant retailers make preemptive efforts to improve their balance sheets, we will have few other options than to downgrade their ratings,” Park said.