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https://scmp.com/business/companies/article/3081304/luckin-coffee-investors-rue-implosion-us400-million-bond-bet Companies
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
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
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.
The company’s January 2025 bonds can be converted into shares at US$54.601 each. But with next to no chance of conversion, holders may be left to pursue litigation to recover their money given the debt’s unsecured ranking.
Funds managed by global asset managers BlackRock and State Street Global Advisors were listed among the bond holders as of mid-April, according to data compiled by Bloomberg. Schroders and Neuberger Berman also owned them according to January and February filings.
SSGA and Neuberger Berman declined to comment, while BlackRock and Schroders were not immediately available for comment.
Legal experts see little prospect of Luckin ADS resuming trading given the ongoing investigation into its financial affairs.
“Given the price has fallen so much, if there is no material improvement, there is a possibility that Luckin’s ADS would be delisted,” said Jeffrey Sun, a partner at law firm Orrick based in Shanghai. “There is also a reputation issue at stake for an exchange not wanting to be associated with a company implicated with fraud, unless there is vigorous and successful defence” by the issuer, he added.
While bond holders could ask the company to buy back the notes at par from January 2023 under a put option, it would depend on whether the coffee chain has the cash flow to redeem them, if it survives the scandal.
According to a January filing to the Securities and Exchange Commission, Luckin Coffee had US$1.38 billion of cash and cash equivalents after the January bond sale. It reported a net cash outflow of 1.13 billion yuan for the first nine months of 2019, according to its latest published accounts.
Like other Chinese companies incorporated in offshore havens, Luckin’s assets are attached to its Chinese subsidiaries, Orrick’s Sun added. The structure gives priority to potential claims from onshore creditors including its employees, ahead of foreign creditors.
“If eventually its business failed in China, their employees or suppliers did not get paid and there is not enough money in Luckin’s offshore account, its creditors offshore might never get much of their money back,” said Sun.
Additional reporting by Alison Tudor-Ackroyd