Lotte Construction Secures 300 Billion Won in 'AAA-Rated' Funding... Accelerates Financial Improvement [Real Estate AtoZ]

Second ABS Issuance Using Construction Payment Claims
Early Recovery of 770 Billion Won by First Quarter Next Year
PF Contingent Liabilities at 2.4 Trillion Won, Targeting 2.2 Trillion Won by Year-End

Lotte Construction has raised an additional 300 billion won in funding by securing the highest credit rating with construction payment receivables as collateral.

Lotte Construction announced on July 7 that it issued a second tranche of asset-backed securities (ABS) worth 300 billion won, following the first issuance of 300 billion won in May. ABS refers to a process by which a company creates securities backed by money it expects to receive in the future, sells them to investors, and secures capital in advance.

Lotte Construction Headquarters, Seocho-gu, Seoul. Photo by Yonhap News Agency

Of the 300 billion won issued this time, 150 billion won will mature in one year and the remaining 150 billion won will mature in one year and three months. Five securities firms—KB Securities, Hana Securities, Kiwoom Securities, Samsung Securities, and Korea Investment & Securities—participated as underwriters.

According to the company, the first issuance in May enabled an early collection of 460 billion won in construction costs, while this second issuance will allow for an early collection of 770 billion won. Combining both rounds, Lotte Construction expects to secure a total of 1.23 trillion won in cash by the first quarter of next year.

The ABS issued this time has received the highest AAA credit rating. Although Lotte Construction's own credit rating stands at A0, the ABS benefited from additional credit support from financial institutions and the operation of Lotte Construction's deposits. Not only construction receivables from nearly-completed residential projects but also receivables from projects by group affiliates were included in the underlying assets. As a result, the company was able to raise funds at a lower cost compared to borrowing on its own credit alone. The interest rate was also set lower than for previous borrowings. The interest rate for the first ABS issued in May was 3.9%, while the second ABS carries an interest rate of 4.3%.

Lotte Construction Issues Construction Payment Claim Asset-Backed Securities. Lotte Construction

Profitability indicators are recovering. Operating profit for the first quarter of this year reached 50.4 billion won. The cost-to-sales ratio stood at 91.7%, down 3.7 percentage points from the same period last year (95.4%). This ratio represents the portion of sales taken up by construction costs—a lower ratio means higher profit for the same level of sales. Cash inflow is also forecast to increase next year. When about 20 high-quality projects are completed next year, 2.6 trillion won in construction payments will flow in.

As of the end of June this year, Lotte Construction's outstanding balance of real estate project financing (PF) contingent liabilities stood at around 2.4 trillion won. This was the result of moving large-scale development projects such as the Gwangju Ssangryeong Park project in March and the Homeplus Bucheon Sangdong and Dongdaemun store development projects in June to main (senior) PF. The company plans to reduce contingent liabilities further to the 2.2 trillion won range by the end of this year.

A representative from Lotte Construction stated, "This second AAA-rated ABS issuance serves as reaffirmation of the market's trust in Lotte Construction and marks the establishment of a sustainable funding system," adding, "We will strengthen our financial fundamentals by ensuring robust cash flow management and a focus on profitability-driven management."

This content was produced with the assistance of AI translation services.