Fitch Rating has assigned LOTTE Rental Co., Ltd. a first-time Long-Term Issuer Default Rating (IDR) of 'BBB-' and a Short-Term IDR of 'F3'.
The Outlook is Stable.
The ratings are based on LOTTE Rental's Standalone Credit Profile without factoring in extraordinary shareholder support in light of its independent operations. This is despite the company being part of the multinational conglomerate, LOTTE Corporation.
Established in 1986 and listed on Korean Stock Exchange in 2021, LOTTE Rental is South Korea's largest car rental company, with a market share of around 21% in 2023. Its operations comprise car rental (64% of 2023 revenue), used car sales (27%) and general rental (9%). Its rental revenue predominantly comes from long-term car rental.
Key Rating Drivers
Established Franchise: LOTTE Rental's IDR is underpinned by its established market presence, consistent business model and record of stable financial performance, with its operations benefiting from South Korea's robust automobile industry. This is balanced by its exposure to residual value risk, modest profitability and a low liquidity coverage ratio.
We expect LOTTE Rental to maintain its leading market position in the medium term, despite rising competition in the retail rental market from new entrants. The company has been expanding into retail rental and used-car long-term rentals to enhance customer acquisitions.
Long-Term Rental Supports Risk Profile: LOTTE Rental's focus on asset-backed, long-term rentals lowers its business risk compared with global peers that concentrate on short-term rentals, which are more vulnerable to travel demand fluctuations. Long-term car rentals represent 80% of the company's car rental revenue.
Operational Risk: The company's heavy reliance on vehicles from Hyundai Motor Company (A-/Stable) and Kia Corporation (A-/Stable) poses risk to business continuity, though this is mitigated by its longstanding partnerships with the automakers and status as their largest domestic customer. However, the automakers do exert pricing power due to their dominant market position.
Managed Residual Value Risk: LOTTE Rental has a sound record in managing residual value risk with persistent profit from selling used cars. This is partly due to the stable automotive market in South Korea, which is dominated by Hyundai and Kia, and limited presence of imported vehicles. An expanding export channel also reduces the volatility in the domestic used-car market.
Sound Asset Quality: LOTTE Rental has strong asset quality, with a low average provision for total rental and leased assets of 0.3% from 2020 to 2023. This is supported by its focus on asset-backed, long-term rentals and diversified asset portfolio; its top-10 clients comprise only 3% of total rental assets.
Modest Profitability: Profitability has varied in recent years, impacted by market disruption during the Covid-19 pandemic and volatile used-car disposal gains, which constituted 6%-16% of net operating income over the last four years. Despite higher funding costs, pre-tax return on average assets reached 2.4% in 2023, from 2.1% in 2022, buoyed by an improved customer retention rate and lower insured-accident rate. We expect its expansion into used-car long-term rentals to further stabilise profitability over time.
Moderate Leverage: The company aims to maintain its leverage, measured by the debt/tangible equity ratio, below its internal threshold of 4.0x over the medium term. Leverage stood at 3.4x at end-2023. We believe LOTTE Rental's ongoing business expansion will outpace internal capital generation, with the strategy shift from used-car sales to used-car long-term rental tempering profitability in the short term. However, the long-term impact should be positive.
Reliance on Wholesale Funding: The company depends on confidence-sensitive wholesale funding, with bonds constituting 53% of total borrowings at end-2023, followed by bank loans (18%), commercial paper (11%), card installments (10%) and asset-backed securities (8%).
Weak Liquidity Coverage: We estimate LOTTE Rental's liquidity coverage ratio, measured by unrestricted cash and unused committed credit facilities, may fall short in fully covering its short-term borrowings. Nonetheless, the company's limited usage of encumbered assets and its standard and liquid vehicle assets mitigate refinancing risk. Unencumbered asset adequately covered 1.8x of unsecured debt at end-2023.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A sustained increase in the debt/tangible equity ratio to above 5x without proportional capital enhancement.
A significant deterioration in asset quality.
Weakening market position in an increasingly competitive rental market.
Reduced access to funding due to negative market sentiment potentially linked to Lotte Group affiliates.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade is less likely in the near term, as LOTTE Rental's credit profile is constrained by its smaller size compared with higher-rated peers. However, over the longer-term, the rating would benefit from an enhanced franchise, more robust profitability and an improved liquidity coverage ratio to above 1x, provided no weakening in capitalisation or asset quality.
ADJUSTMENTS
The asset quality score has been assigned below the implied score due to the following reasons: risk profile and business model.
Date of Relevant Committee
14 June 2024
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
LOTTE RENTAL CO.,LTD. 
