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Photo = Lotte Group |
[Alpha Biz= Kim Jisun] Perpetual bonds issued by affiliates of Lotte Group in the private market are facing criticism for effectively functioning as short-term instruments, due to early step-up clauses embedded in their structures.
According to investment banking sources on April 1, Lotte Corporation issued KRW 150 billion worth of hybrid capital securities on March 30. While these instruments are classified as perpetual bonds with a 30-year maturity and treated as equity for accounting purposes, their interest structures suggest otherwise.
Of the issuance, KRW 100 billion carries a coupon rate of around 5%, with a 200 basis point (bp) step-up after 1 year and 3 months. The remaining KRW 50 billion carries a 5.35% rate, with a 200 bp increase after two years, followed by an additional 50 bp annually. This structure incentivizes early redemption, effectively making the bonds behave like short-term debt.
Similar patterns were observed across other affiliates. Lotte GRS and Lotte Global Logistics each issued KRW 50 billion in hybrid securities at interest rates in the 6% range. These bonds feature a 300 bp step-up after 2.5 years, followed by an additional 100 bp annually.
Hotel Lotte issued KRW 220 billion in similar instruments at a 5.793% rate, with identical step-up conditions. Meanwhile, Lotte Cultureworks issued KRW 100 billion in perpetual bonds, featuring a 250 bp increase after 2.5 years and an additional 50 bp annually thereafter.
Although perpetual bonds are typically used to strengthen balance sheets by being classified as equity, the presence of early step-up clauses and call options often leads issuers to redeem or refinance the debt before interest costs rise. This has led market observers to argue that such instruments are “perpetual in name only.”
Historically, call options on perpetual bonds were structured to begin after five years. However, following the COVID-19 pandemic, heightened investor risk aversion has pushed issuers to shorten call option periods, reinforcing the trend toward quasi short-term financing structures.
Alphabiz Reporter Kim Jisun(stockmk2020@alphabiz.co.kr)
