Car Inc.’s Creditors Still Stuck in Chairman’s Web

(Bloomberg Opinion) -- Car Inc. has lost the chairman that it shared with scandal-tarred Luckin Coffee Inc., (almost) cut a deal for a state-backed bailout, and is working with lenders for waivers on debt.

So, all’s well with China’s largest car rental company? Not quite.

Let’s start with the chairman’s departure. On Wednesday, Charles Lu Zhengyao resigned to spend more time at affiliate UCAR Inc., one of the rental firm’s largest shareholders, and other businesses. This is good news, in theory, as he’s likely to be distracted by the deepening accounting fraud case reported by local media at his much-hyped coffee chain. The reality is more complicated, but investors once again have cheered news that his hold on Car Inc. is easing.

Is it? Even if Lu is out, Car Inc. and UCAR remain deeply intertwined. Investors should wonder whether his name coming off the securities filings really means he’s gone for good. Some other board members remain affiliated with UCAR, or are management-level executives there. The ex-chairman, through various entities he controls, conducts several related-party transactions.

As of the first quarter, the rental company was owed almost 500 million yuan ($70 million) in trade receivables from its parent and owed around 100 million. UCAR was Car Inc.’s largest customer, largely due to fleet rentals. As of March 30, Car Inc. also held a stake in UCAR, losing money on it last year as fair value decreased. They’re tied up in other ways: Car Inc. shelled out 788 million yuan in the last half of 2019 toward UCAR’s subsidiary Beijing Borgward Motor Co. 

This tangle isn’t going away, but Car Inc. hopes pressure from its obligations can. The company says that it’s speaking to creditors about waiving $168 million of immediately due debts. The expectation is that their jitters will be eased by last week’s news that a deal is in the works for state-backed car company Beijing Automotive Group Co., the Chinese joint-venture partner for Daimler AG-owned Mercedes-Benz and Hyundai Motor Co., to rescue the rental firm.

There are questions about how much sense the proposed bailout makes for either company, as I wrote, and if it can really free Car Inc. from its ties to UCAR. It’s unclear whether the transaction will even be completed; final terms haven’t been agreed. The deal would be similar to one with U.S. private equity firm Warburg Pincus LLC that Car Inc. terminated a few weeks ago. Such agreements at Chinese companies don’t always work out, according to analysts at HSBC Holdings Plc. For instance, bonds rallied at Huachen Energy Co. when a state-owned entity came in for a rescue, but the deal eventually expired and nothing was concluded.

Next, consider the waivers. Agreements with Car Inc.’s creditors hold that if Lu is no longer a director, lenders can ask for the immediate return of the outstanding principal, accrued interest and other payables. Given the stress on the company and the market, Car Inc. is asking for a waiver. But why should creditors defer the $168 million due to them? It’s not like the business is going to turn around any time soon, and the balance sheet needs work. Conditions for renting cars will stay gloomy for some time after the Covid-19 hit. The company’s capital allocation is poor, as analysts at Lucror Analytics note. That isn’t going to change.

Car Inc. could talk lenders into a distressed exchange. That may help stave off a default as Lu’s network unravels, but would probably come at a loss to creditors, a phenomenon that analysts at Moody’s Investors Service have noted in recent months at other troubled companies. Geo Energy Resources Ltd. is a case in point. The mining company bought back over $100 million of its debt at around a 40% discount to par value. Typically, the lower the likelihood of a borrower making good on obligations, the larger the discount. Car Inc. has few alternative channels to raise cash.

Car Inc. remains China’s biggest rental company in the world’s largest car market. The prospects for growth — pre-pandemic — were bright. It could make the business work, or at least get access to the credit it needs to keep things rolling until the market comes back, should it manage to be restructured to cut dependence on Lu’s web. Short of that, there’s not much to look forward to.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

©2020 Bloomberg L.P.

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