- Published 2026.11.10 08:45
Secures 2.5 trillion won by transferring LG Energy Solution stake
Derivative structure requires paying difference if stock price falls
Amid 27 trillion won debt, restructuring of core business and finances
LG Chem has been cashing out its stake in subsidiary LG Energy Solution to raise funds. However, this only provides superficial liquidity and is insufficient to actually fend off the surge in debt and downward pressure on its credit rating. The price return swap (PRS) method used for large-scale fundraising may appear as a sale on the books, but it is essentially a derivative transaction that leaves the company fully exposed to stock price fluctuations at maturity, limiting the debt reduction effect.
LG Chem announced on Oct. 28 that its board approved the disposal of 6,535,939 common shares of LG Energy Solution (a 2.79% stake) through a PRS, securing about 2.5 trillion won (about $1.8 billion). The disposal lowers LG Chem's stake from 79.38% to 76.59%. Combined with the 3.4 trillion won (about $2.5 billion) raised earlier through exchangeable bonds and a first PRS contract, the cumulative funds secured using LG Energy Solution shares reach 5.9 trillion won (about $4.3 billion).
The company chose the PRS method instead of a full market sale to maintain control and minimize market impact. However, a PRS involves transferring the asset to a financial institution to raise cash, with final settlement at maturity based on the price change of the underlying asset. If the stock price rises above the contract reference price, LG Chem receives the gain; if it falls below, it must pay the difference in cash. In effect, it is a contingent liability where the company borrows against its shares and bears the downside risk.
Credit rating agencies do not fully recognize this fundraising as debt reduction or capital increase. PRS contracts are typically treated as de facto borrowings disguised as derivatives in assessing credit metrics. Moreover, of the 2.5 trillion won (about $1.8 billion) raised, about 400 billion won (about $294 million) of the after-tax proceeds will be used for shareholder returns such as share buybacks, cancellations, and dividends. Even if all incoming cash were used for repayment, net debt reduction would be only in the mid-1 trillion won range. Considering net debt surged from about 10 trillion won (about $7.4 billion) at end-2021 to 22.9092 trillion won (about $17 billion) at end-2025 and to the 27 trillion won range in the first half of 2026, this only shaves a tiny fraction of the rapidly growing debt.
The potential loss risk is already materializing. The contract's reference price was set at 382,500 won per share, but immediately after the disclosure, concerns over a large overhang pushed LG Energy Solution's stock price down to around 350,000 won. If the stock price fails to recover to the reference price by maturity, LG Chem will be trapped into paying additional cash to cover the difference. In seeking liquidity, it has amplified future cash outflow risk.
The delayed recovery in core business profitability further heightens credit concerns. Due to oversupply from China and slowing global demand, the petrochemicals division remains mired in annual losses of hundreds of billions of won, while new growth drivers like battery materials and advanced materials also face strong downward pressure on profitability from temporary demand stagnation. With operating cash flow weakening and annual capital expenditures of several trillion won, the company has fallen into a structural free cash flow deficit.
Korea Investors Service lowered the outlook on LG Chem's AA+ rating to negative in April 2026, and Korea Ratings downgraded the rating itself from AA+ to AA in June 2026. The rating triggers cited by the agencies remain unresolved, and the liquidity raised through the subsidiary stake sale has clear limitations.
LG Chem plans to lower its stake to around 70% by 2030 to secure an additional 5 trillion won (about $3.7 billion) or more. However, repeated stake sales could deepen the subsidiary's stock price decline and overhang issues, reducing future fundraising value. Without a rebound in core business earnings and fundamental financial restructuring, relying on derivative-based disposals will make it difficult to avoid further rating downgrades. How much profitability the company can restore within the period secured by stake monetization will be a key indicator of its ability to defend its credit standing.
(Dollar figures are approximate, converted automatically at 1,000 won = $0.735, the rate on Nov. 10, 2026.)
※ This article is an AI translation of the Korean original published by Korea Credit News; it was checked by automated quality guards and published by the English edition desk.
