Lotte Rental... Private Equity Fund's 'Bolt-On' Strategy, More Positive Than Group Support

[Korea Financial Times, Lee Sungkyu] Lotte Rental, which is in the process of being sold, is launching a public corporate bond offering. The company's departure from Lotte Group is said to have limited impact on demand forecasts for public bonds as it was not expected to receive group support in the first place. On the contrary, it is expected that the reason for the issuance will be expanded, such as raising corporate value under the private equity umbrella.

According to the investment banking (IB) industry on the 15th, Lotte Rental will start demand forecasting for a public corporate

bond issue worth KRW 100 billion. The maturity is composed of 1.6-year (KRW 40 billion) and 2-year (KRW 60 billion) bonds, and the company plans to issue up to KRW 200 billion more depending on the demand forecast.
The proceeds will be used to redeem public bonds maturing this month. KB Securities, NH Securities, Kyobo Securities, Mirae Asset Securities, and Kiwoom Securities are the lead managers, while Hanwha Securities, Hanyang Securities, and Daeshin Securities are the underwriters.

Lotte Rental is currently up for sale. The company has selected Affinity Equity Partners as the preferred bidder for the sale of stakes held by Hotel Lotte (35.0%) and Busan Lotte Hotel (21.2%).

Normally, domestic group affiliates are upgraded by one notch for 'group supportability'. However, some credit rating agencies did not reflect the potential for affiliate support in Lotte Rental's rating, saying that there is no difference between Lotte Rental and the group's consolidated creditworthiness.

On the other hand, Korea Credit Rating Agency placed Lotte Rental's rating on 'review for downgrade' due to a change in the majority shareholder. The rating of Lotte Rental is 'AA-' and other rating agencies have assigned 'A+' to Lotte Rental, so 'A+' is effectively the effective rating.

The sale of Lotte Rental is unlikely to have a negative impact on the public bond issuance as it is unlikely to be supported by Lotte Group. On the contrary, Lotte Rental plays a role in securing Lotte Group's liquidity.

Lotte Rental is also considered to be a strong affiliate within Lotte Group. This is especially true when compared to other flagship subsidiaries, which have been hit hard by a sluggish industry, their own liquidity problems, and strategic failures.

Debt financing is essential in the rental industry. It uses financing to buy rental assets and generate revenue from them. The lower the financing cost, the better for the business, so the rating upgrade due to the possibility of affiliate support is significant. On the flip side, Lotte Rental is part of Lotte Group, but that doesn't mean much to investors.

Rather, it is expected to grow through a 'bolt-on' strategy if it is sold to a private equity firm. 'Bolt-on' refers to a strategy of acquiring a company in the same industry to expand its market share and increase its value. Affinity Equity Partners has already acquired SK Rent Car, and with Lotte Rental, it will become the No. 1 rental company in Korea.

Lotte Rental has never been properly “Value-up” since going public. This is why private equity firms that prioritize corporate value enhancement are said to be better than Lotte Group.
“Private equity funds are not well-regarded in Korea, but the Lotte Rental acquisition is different,” said an investment banking (IB) official, adding, ”There are many opinions that it would be better for investors if the company was sold to Affinity.” “It's worth noting that group support has rarely been rated lower than private equity acquisitions,” he added.

Lee Sungkyu (lsk0603@fntimes.com)