A group of lenders is preparing to sell 76.4 million shares of Chinese beverage chain Luckin Coffee after a company controlled by the family of the coffee chain’s chairman defaulted on a $518 million loan.
Why it matters: The default followed a disclosure on Thursday that Luckin Coffee’s head of operations had fabricated billions of RMB worth of sales for most of 2019, sending the company’s share prices plummeting.
Details: On behalf of a syndicate of lenders, Goldman Sachs said Monday that it has started the enforcement process “in order to satisfy the borrower’s obligations” on a $518 million margin loan.
- The borrower, Haode Investment Inc., is an entity controlled by the family of Lu Zhengyao, chairman of Luckin’s board of directors. The total shares include some from a trust controlled by the family of Qian Zhiya, the company’s CEO.
- Morgan Stanley, Credit Suisse, Haitong, CICC, and Barclays were among the list of lenders, according to a Reuters report.
- Lu’s voting interests in the company will not decrease even if all the pledged shares were sold, but Qian’s beneficial and voting interests would “decrease significantly,” Goldman Sachs said in the statement.
- A total of 515,355,752 Class B ordinary shares and 95,445,000 Class A ordinary shares were pledged to secure the loan.
- The Wall Street Journal reported that the banks could lose up to $100 million from the loan.
- In response to the news, Luckin shares tumbled 18.4% to close at $4.39 per share on Monday, after sinking 75.6% on Thursday on the fraud disclosure.
Read more: Luckin Coffee admits to sales fraud
Context: Luckin said on Thursday that an estimated RMB 2.2 billion ($310 million) worth of its sales from the second to the fourth quarter of 2019 were fabricated by its COO and a number of employees who reported to him.
- Before the company’s debut on Nasdaq in May, Lu was said to be seeking a loan of at least $200 million from banks including Goldman Sachs and Morgan Stanley using Luckin shares as collateral, which the company denied.
- Lu lost $1 billion, or 60% of his net worth, on the drop in share price, according to Bloomberg.
- In April last year, Luckin registered RMB 45 million worth of movable assets as collateral to a Beijing-based firm, in an early sign of a cash crunch.