Lotte Group's Financial Health Under Scrutiny

Recent credit rating downgrades for key affiliates of Lotte Group have raised alarms about the conglomerate's liquidity and financial stability. This development has particularly sparked concerns over the safety of parking-type exchange traded funds (ETFs) that incorporate Lotte's short-term bonds.

Domino Effect of Credit Downgrades

Following the downgrade of Lotte Chemical's credit rating, major affiliates including Lotte Holdings, Lotte Capital, and Lotte Property & Development have faced similar adjustments. The petrochemical industry's sluggish performance and the group's mounting financial pressures were cited as primary reasons.

Market Borrowings and Refinancing Challenges

Lotte Group's market borrowings, encompassing corporate bonds and commercial papers, total approximately 25.6 trillion won, with a significant portion due within the next year. The inability of Lotte Engineering & Construction to sell bonds last month underscores the growing market skepticism.

ETF Market Concerns

The ripple effects are now reaching the parking-type ETF market, traditionally seen as a safe haven for investors. With several ETFs holding Lotte's short-term bonds, there's growing apprehension about potential impacts on these funds should the group's liquidity issues worsen.

Management's Response

ETF management companies, while currently downplaying the risk of credit events, are adopting a cautious approach. Shinhan Asset Management, notably exposed to Lotte's bonds, is considering reducing its holdings to mitigate investor concerns.