Banks Face $300 Million Shortfall on Luckin Margin Loans

(Bloomberg) -- Banks including Credit Suisse Group AG and Morgan Stanley face a $300 million shortfall on margin loans to the embattled founder of Luckin Coffee Inc.

The lenders, which also include Haitong International Securities Group and Goldman Sachs Group Inc., raised about $210 million over the past two months selling Luckin shares that Chairman Lu Zhengyao had pledged as collateral, people familiar with the matter said. Lu defaulted on $518 million of margin debt in early April, Goldman said in a statement at the time, after revelations of accounting fraud caused the Chinese coffee chain’s stock to plunge.

The share sales represent the latest attempt by Lu’s creditors to limit losses from a scandal that has fueled calls in Washington for tougher scrutiny of financial ties between the U.S. and China. Luckin’s fall from grace blindsided some of the biggest names on Wall Street just as they were gearing up for a historic expansion into Asia’s largest economy.

Spokespeople for the lenders declined to comment. Luckin didn’t immediately respond to multiple requests.

Goldman, tapped by lenders to oversee the stake disposal, said in April that it would sell as many as 76.35 million of Luckin’s U.S.-listed shares. The firm has now liquidated the entire position, one of the people said, asking not to be identified discussing private information.

A back of the envelope calculation suggests the shares were sold for $2.75 apiece on average. That compares with the closing price of $26.20 before the Luckin scandal emerged and the $3.18 average price since April 6, when Goldman announced plans to offload the stake.

Luckin gained 8.3% to $4.32 in pre-market trading as of 5:12 a.m. in New York. The share sales by banks remove one potential overhang for the stock.

Credit Suisse and Morgan Stanley each put up about $97 million for the margin loans, while Haitong International lent about $134 million, one of the people said. Goldman and Barclays Plc lent $73 million and $78 million, respectively, while China International Capital Corp. contributed $39 million.

It’s still unclear whether the banks will ultimately lose money on the loans. They’re also pursuing the assets of an investment company controlled by Lu’s family trust, Bloomberg News reported last month. The investment company has disputed that it’s in default and has requested an injunction in Hong Kong to prevent liquidation proceedings, according to a May 6 court filing.

Lu became a billionaire after his fast-growing Starbucks rival went public in the U.S. last year. But much of his wealth has since been wiped out by the 85% plunge in Luckin’s stock since April, when the company disclosed that some of its employees may have fabricated billions of yuan in sales.

Chinese regulators have obtained emails purporting to show Lu instructed financial fraud, business news outlet Caixin reported this month, citing unidentified people close to the agencies. Regulators found evidence of fraud at Luckin in their investigation, Caixin cited several people as saying.

Lu has previously denied deceiving investors. “My personal style may have been too aggressive and led the companies to run too fast, which has triggered many problems,” he said in a statement last month. “But I never lied to investors with the idea of ‘selling concepts.’ I’m working hard to make the company bigger and better to create value for society.”

©2020 Bloomberg L.P.