TEXT-Fitch places Lotte Shopping on negative watch on potential Hi-Mart buy

(The following statement was released by the rating agency)

July 04 - Fitch Ratings has placed Lotte Shopping.,Ltd.'s (Lotte) Long-Term Foreign Currency Issuer Default Rating (IDR) and senior unsecured rating of 'A-' on Rating Watch Negative (RWN). This follows the announcement by Lotte that it was selected as the preferred bidder for a majority stake in Hi-Mart, the largest home appliance retailer in Korea.

Fitch believes that Lotte's credit profile will deteriorate after the potential acquisition as it will likely be debt-funded. Aggressive investments increased Lotte's adjusted net debt in its non-financial operations to KRW6trn at end-December 2011 from KRW3trn at end-2009. This caused its net leverage (adjusted net debt to operating EBITDAR) from its non-financial operations to increase to 2.5x from 1.8x, the threshold for a negative rating action. As such, there remains little headroom within the company's current rating even before the proposed acquisition. With the acquisition, Fitch expects Lotte's net leverage to increase significantly above 2.5x.

In resolving the RWN, Fitch will consider the business synergy that Hi-Mart will bring to Lotte in relation to the worsening financial profile. Fitch also notes that Lotte's own operating performance has deteriorated in the year to date and that if there is no improvement in the second half, it will also weigh negatively on Lotte's ratings.

Fitch expects the acquisition to result in a single-notch downgrade.