Luckin Coffee investors rue implosion on US$400 million bond bet after accounting scandal

Luckin Coffee’s accounting scandal puts its US listing at risk, leaving investors in a flux as stock, bond prices sank

Legal experts see little prospect of Luckin ADS resuming trading given the ongoing investigation into its books

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Luckin Coffee, the fast-growing Chinese coffee chain and Starbucks rival, plunged after the company said its board is investigating reports that senior executives and employees fabricated transactions. Photo: Bloomberg

Published: 6:30am, 24 Apr 2020Updated: 4:44pm, 24 Apr 2020

Investors in Luckin Coffee’s US$400 million of convertible bonds are ruing their fate after an accounting scandal sent the securities into distressed territory, barely three months after the debt sale.

The notes, which pay 0.75 per cent annual coupon and confer holders the right to convert them into stock, plunged to as low as 10 cents on the dollar, after the Chinese coffee chain said top executives fabricated sales amounting to 2.2 billion yuan (US$311 million). The bonds recently fetched about 20 cents, yielding more than 35 per cent.

Luckin Coffee’s stock has been halted from trading on Nasdaq since April 7, after it plunged 83 per cent over three days to US$4.39, leaving bond holders deeply out of money. The scandal has triggered scores of lawsuits from holders of its American depositary shares in yet another reminder of governance risk among US-listed Chinese entities against the backdrop of acrimonious ties with the US on trade and health crisis.

“There have been frauds and bankruptcies in the past by Chinese ADR-listed companies with outstanding US convertible bonds,” said Skander Chabbi, head of convertible bonds in Paris at BNP Paribas Asset Management. “Usually the companies lose their ADR listings.”

The speed of the implosion has some parallels in the recent history of Asian bond market with accounting issues, including one at Noble Group. The Hong Kong-based commodity trader sold US$750 million of bonds in March 2017, which tumbled two months later as a surprise profit warning precipitated the biggest debt restructuring in the region at the time.

The problem with an issuer faking sales, among other things, is that it makes a big dent to a company’s net income, and therefore crushes all expectations of it breaking even in the short term, Chabbi said.

Luckin declined to comment on the latest situation, according to its external spokesman.

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