LG Chem still has 26 trillion won in net debt despite monetizing a 2.5 trillion won stake; financial recovery remains a long way off [fn Market Watch]

[Financial News] LG Chem is seeking to raise 2.5 trillion won by using its stake in subsidiary LG Energy Solution, but the resulting improvement in its financial structure is expected to be limited. Taking into account shareholder-return measures and other factors, the reduction in net debt is estimated at around 1.6 trillion won. Even after the transaction, net debt is expected to remain at about 26 trillion won, at least 3 trillion won above the level at the end of last year.
According to the financial investment industry and Korea Ratings Corporation on the 30th, LG Chem’s net debt after accounting for its price return swap (PRS) transaction involving its stake in LG Energy Solution is estimated at 25.9932 trillion won. That would be 1.6 trillion won lower than the 27.5922 trillion won recorded on a consolidated basis at the end of June this year, but 3.084 trillion won higher than the 22.9092 trillion won at the end of last year.
The debt ratio is also expected to fall by just 4.1 percentage points, from 129.6% at the end of June this year to 125.5%. It would still be 11.0 percentage points higher than the 114.5% at the end of last year.
LG Chem’s borrowing burden has grown rapidly in recent years. On a consolidated basis, total borrowings rose from 21.9281 trillion won at the end of 2023 to 33.8120 trillion won at the end of last year and 40.2892 trillion won at the end of June this year. Over the same period, net debt more than doubled, from 12.7861 trillion won to 27.5922 trillion won.
On the 28th, LG Chem disclosed plans to dispose of 6,535,939 common shares in LG Energy Solution through a PRS transaction. Based on the closing price of 382,500 won per share on the 27th, the transaction is worth approximately 2.5 trillion won. The contract term is two years, and the shares are scheduled to be disposed of between November 27 and December 24.
The company plans to use 400 billion won, about 20% of its after-tax cash proceeds, for shareholder returns. Of that amount, 300 billion won has been allocated to share buybacks and cancellations, and the remaining 100 billion won to this year’s year-end dividend.
Han Min-su, a researcher at Korea Ratings Corporation, estimated that, taking these shareholder-return plans and other factors into account, the reduction in net debt would be limited to 1.6 trillion won. Total equity is projected to increase from 48.8709 trillion won at the end of June this year to 50.4709 trillion won. LG Chem’s stake in LG Energy Solution will fall from 79.38% to 76.59% after the transaction, but it will retain control, which is expected to strengthen equity on the consolidated financial statements.
Settlement risk associated with the PRS transaction also remains. A PRS is a structure that raises funds using shares and later settles the difference between the disposal price of the underlying shares and the contract price. If the final disposal price is lower than the contract price, LG Chem must pay the difference to investors.
In November last year, LG Chem also entered into a PRS transaction worth approximately 2 trillion won, using 5.75 million LG Energy Solution shares as the underlying asset. Including the current transaction, the settlement reference amount comes to approximately 4.5 trillion won. This is not a confirmed debt or loss amount, but a cash settlement burden could arise depending on LG Energy Solution’s share price and when the underlying shares are disposed of.
LG Chem plans to gradually reduce its stake in LG Energy Solution to around 70% by 2030. Attention will also be paid to how the cash proceeds from further stake monetization, together with PRS settlement burden, affect financial stability.
Korea Ratings Corporation maintained LG Chem’s ‘AA’ credit rating and ‘Stable’ outlook, assessing the transaction’s credit impact as limited. It plans to continue monitoring how the funds raised are used, the scale of shareholder returns, PRS settlement burden, and the impact of further stake monetization on improvements to the company’s financial structure.

[email protected] Kim Hyun-jung Reporter