Luckin pileup crashes into China’s car lot

Luckin Coffee

08/05/2020 02:55

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Alec Macfarlane
    HONG KONG, May 8 (Reuters Breakingviews) - The scandal at
Luckin Coffee  LK.O  is spilling into China’s car lot. The
accounting fraud debacle at the New York-listed Chinese chain
has hit shares in Car Inc  0699.HK , a Hong Kong-listed auto
rental outfit chaired by Luckin founder Lu Zhengyao. Lu also
leads ride-hailing firm Ucar, where lenders could dump a slug of
Car Inc stock pledged as collateral and trigger a change of
control, dragging in private equity firm Warburg Pincus.
    Luckin was supposed to be a Chinese contender to Starbucks
 SBUX.O , but unfortunately its sales figures were too good to
be true. Last month it disclosed over $300 million of fabricated
transactions, and the stock crashed. Lu then defaulted on $518
million in loans, leaving major Wall Street banks stuck with
Luckin shares pledged as collateral that they could only sell at
a heavy loss. 
    The margin calls keep piling up. Shares in Hong Kong-listed
Car Inc, which Lu also founded, have roughly halved since the
scandal broke; Ucar, Lu’s other big auto venture, was the
largest investor in Car Inc with a roughly 30% stake. Ucar
pledged shares in the company as collateral for loans. With Car
Inc’s shares trading at low levels, there are now fears that
Ucar’s creditors could dump the stock and trigger a change of
control. That would accelerate debt repayments that Car Inc may
not be able to meet.
    Long-time Car Inc backer Warburg Pincus helped alleviate
some of the pressure in April, buying another 17% stake from
Ucar in two tranches, the second of which will only be completed
if certain conditions are met. If successful, it could help fend
off a change of control and protect Warburg Pincus’ stake. But
the Covid-19 pandemic has hammered demand for rental cars and
dented profits, making the private equity firm’s doubling down
on Car Inc all the more risky.
    Warburg Pincus sat out Luckin’s private fundraisings, yet it
has still found itself exposed to the debacle thanks to Lu’s
cross-shareholdings and margin loans that are now unwinding in a
falling market. It’s a brutal lesson in key-man risk.
    On Twitter https://twitter.com/AlecMac11
    
    CONTEXT NEWS
    - Ratings agency S&P on April 27 downgraded Car Inc and its
U.S. dollar bonds to CCC from B– with negative outlook, citing
heightening liquidity pressure and challenges as lenders monitor
the Chinese auto rental company’s shareholding structure and
operating performance.
    - S&P said that the Hong Kong-listed company’s remaining
liquidity may not be sufficient to cover its maturities over the
next 12 months, including $300 million of bonds due in February
2021.
    - It is S&P's second downgrade of Car Inc in less than a
month after an accounting scandal at Luckin Coffee affected the
company’s access to capital markets and operations. 
    - Car Inc’s chairman is Lu Zhengyao, who also co-founded the
embattled coffee chain. 
    - For previous columns by the author, Reuters customers can
click on  MAC/ 
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HKEX filing    https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0506/2020050600570.pdf
BREAKINGVIEWS - Asia Pacific is primed for its next 11-digit LBO
    urn:newsml:reuters.com:*:nL4N28G1RL
BREAKINGVIEWS - Hong Kong IPOs get away with a protest discount 
   urn:newsml:reuters.com:*:nL3N27K09Q
BREAKINGVIEWS-Arduous road awaits refueled Chinese used-car app 
    urn:newsml:reuters.com:*:nL4N2350QS
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Pete Sweeney and Sharon Lam)
 ((alec.macfarlane@thomsonreuters.com; Reuters Messaging:
alec.macfarlane.thomsonreuters.com@reuters.net))