Lotte E&C in Liquidity Crisis
Lotte Engineering & Construction (Lotte E&C), which is suffering a liquidity crisis, has received 1.1 trillion won in financial support from its sister companies over a period of one month.
The construction arm of Lotte Group normally financed its real estate projects through asset-backed commercial paper (ABCP), a short-term promissory note issued to repay maturing asset-backed securities, but the Legoland incident made it difficult for the builder to issue ABCP. As the builder had to repay ABS directly, it had no choice but to receive liquidity support from its sister companies within Lotte Group.
According to Korea Credit Ratings, Lotte E&C’s contingent liabilities amounted to about 6.7 trillion won as of Oct. 21. Among them, debts maturing at the end of this year stood at 3.1 trillion won.
ABCPs are a type of asset-backed securities (ABSs) with short maturity, usually three months. Their interest rate is low. Builders can lower their financial costs for projects that normally take three years by issuing ABCPs instead of long-term securities carrying a high interest rate.
Following the Legoland default, uncertainties over project financing grew and demand for ABCPs vanished rapidly. Lotte E&C lacked cash and had no choice but to borrow money from affiliates in a hurry. As of the second quarter of this year, Lotte E&C’s cash and cashable assets amounted to 595 billion won.