Here’s how Luckin Coffee, the ‘poster child’ and ‘dream client’ of Credit Suisse, turned into the bank’s worst nightmare
- Credit Suisse was the lead underwriter for Luckin’s initial public offering last year in New York and the secondary sale in January, garnering 60 per cent of the banking fees, estimated at US$30 million for two deals valued at US$1.2 billion
- The bank also led a US$460 million convertible bond sale in January and is on the hook for a portion of the US$518 million in margin loans to Lu that are now in default
Before the accounting scandal and the stock crash and the defaulted loans, Luckin Coffee’s billionaire founder Lu Zhengyao was an ideal customer for Credit Suisse Group.
“I’ve had I don’t know how many dinners with him in Beijing and he’s absolutely the poster child for what we want to do,” Tidjane Thiam said at a conference last year when he was still head of the bank. He lauded Lu’s relationship with the firm that ranged from private banking to stock sales. “He’s a dream client.”
Luckin’s dramatic fall from grace this month blindsided some of the top names in global finance but few have seen a bigger fallout than Credit Suisse. The lender lost a high-profile Hong Kong IPO in the wake of the scandal and reported a fivefold increase in loan losses at its Asia-Pacific unit, primarily due to a default by Lu. The bank is conducting an internal review of the case, and scrutiny on loans to Chinese companies has increased, according to people familiar with the matter who declined to be identified discussing private matters.
While Lu hasn’t been accused of wrongdoing, Luckin’s revelation that senior executives may have fabricated US$310 million in sales underscores the risk for investment banks of doing deals in China, following a series of accounting scandals. The world’s second-biggest economy is core to Credit Suisse’s strategy to win business from rich entrepreneurs across Asia.
“Luckin is a microcosm of what can happen when weak underwriting standards are allowed to persist in the pursuit of rapid growth,” said Mark Williams, a professor at Boston University and a former US Federal Reserve bank examiner. “Luckin exhibited many signs of a high-growth, high-risk business.”