Online shopping boom in Korea risks mall debt downgrades

South Koreans are spending record amounts shopping with their mobile devices, raising the risk of debt downgrades for retail giants still focused on mall traffic.

The odds that the nation’s No 1 department store operator, Lotte Shopping Co, will miss debt payments in the coming 12 months doubled to 0.64 per cent from 0.29 per cent a year earlier, according to Bloomberg’s default-risk model that takes into account a company’s finances and stock moves. That suggests it merits a non-investment debt rating. Default risk using the model also climbed for Shinsegae Co, the third-ranked department store operator.

Moody’s Investors Service and Fitch Ratings have both changed their outlook for Lotte Shopping’s score to negative from stable this month, following a cut in Shinsegae’s outlook to negative by Korea Investors Service last month. The nation’s mobile shopping transactions surged 64 per cent to a record 24.4 trillion won (S$28 billion) last year while sales at department stores dropped for a second straight year, according to Statistics Korea data.

“We don’t expect a meaningful improvement in Lotte Shopping’s earnings this year,” said Hong Kong- based senior analyst at Moody’s, Wan Hee Yoo.

Lotte Shopping expects sales in its overseas business to grow this year and it also seeks to increase domestic sales by linking its online and off-line businesses, said its spokesman on Wednesday.

Shinsegae has been making efforts to reduce its debt ratio since last year, including by selling shares of Samsung Life Insurance Co and issuing perpetual bonds, said its spokesman on Wednesday.

The spread on Shinsegae’s dollar notes due in 2045 rose to 185 basis points on Feb 23, the highest since its issue in May, showed Bloomberg-compiled data. Lotte Shopping’s 2017 bond spread has fallen 14 basis points this year to 130.

The nation’s online shopping market is forecast to grow to more than 100 trillion won by 2019, with purchases on mobiles making up about 75 per cent, said Korea Ratings last month, citing Bain & Co’s projection.

Total transactions on the Internet increased 19 per cent to 53.9 trillion won last year, according to Statistics Korea data.

South Korea’s smartphone penetration rate is the world’s fourth highest at 83 per cent as of end-March, according to a KT Economics & Management Research Lab report released in July.