Luckin Coffee lenders seek to sell over 76 million shares after chairman defaults on loan

A group of lenders is seeking to sell more than 76 million shares of Luckin Coffee, pledged as loan collateral, after an entity controlled by the start-up’s chairman defaulted on a US$518 million margin loan, according to Goldman Sachs.

Goldman, which is acting as a “disposal agent”, said a syndicate of lenders is preparing to sell some 76.4 million shares pledged to secure the loan held by an entity controlled by a family trust of Lu Charles Zhengyao, an angel investor and chairman of Luckin, which is a rival to Starbucks in China.

Some of the shares were also pledged by an entity controlled by the family trust of founder and chief executive officer Qian Jenny Zhiya.

“In connection with the exercise of their rights under the facility, the lenders have commenced the process of enforcement against the collateral in order to satisfy the borrower’s obligations under the facility,” according to Goldman.

If all of the shares pledged were sold, Lu’s voting interest in the company would not decrease, but the beneficial and voting interests held by Qian would “decrease significantly”, the investment bank said.

On Monday in New York, Luckin shares shed more than 18 per cent on the Nasdaq and fell to their lowest-ever price of US$4.39.

News of the default comes after the chain suspended its chief operating officer for alleged misconduct on Thursday as part of a continuing investigation.

Starbucks’ China rival Luckin seeks to raise up to US$586.5 million in IPO

The Xiamen-based firm announced that it has formed a committee to lead an internal investigation into fabricated transactions of 2.2 billion yuan (US$309 million) between the second quarter and fourth quarter of 2019 by chief operating officer Liu Jian and several employees. Previously released earnings for the nine months through September are no longer reliable, it said.

Its shares have lost more than 82 per cent of their value since news of its COO’s suspension.

Forbes reported last year that Lu was one of the earliest backers of the start-up and owns around 30 per cent of the company with his wife, Guo Lichun. Their stake is worth nearly US$800 million, it said.

Founder and CEO Qin Zhiya owns 20 per cent in the company, valued at more than US$500 million.