Rating agencies last week slashed CAR INC’s credit ratings, citing the impact of an accounting scandal at LUCKIN COFFEE on its access to capital markets and operations.Moody’s on April 6 cut the Chinese car rental company and its bonds to B2 from B1, before downgrading its rating again to Caa1 on Thursday, with a negative outlook. S&P on Tuesday lowered CAR and its outstanding US dollar bonds to B– from B+.
It also placed the ratings on negative watch.CAR and coffee chain Luckin are separate companies but the market sees them as related because both are controlled by Chinese billionaire Lu Zhengyao, who founded CAR and chairs Luckin. CAR’s shares and bonds slumped on the Luckin news.S&P said CAR’s access to capital markets has been reduced dramatically following significant declines in its share and bond prices.
Moreover, the company’s relationship with banks may be tested, while its capacity to sell used cars is subject to market demand. It pointed out that CAR also risks triggering a change-of-control clause on its outstanding dollar notes should UCAR, also controlled by Lu Zhengyao, lose control of 505m CAR shares pledged as collateral for bank loans. The pledged shares equal around a 24% stake in CAR and served as collateral for Rmb1.4bn (US$200m) of bank loans as of June 2019, according to S&P.
The change-of-control clause could be triggered if the combined holding of UCAR and Legend Holdings Corp (26.59%) drops to below 35% from the current 56.35%, according to S&P.CAR on April 9 said UCAR sold a 2.11% stake in the company on April 3 at the request of certain lenders and is “in ongoing discussions with various parties in relation to its remaining shareholding in the company”.
Following the disposal, which took place under the terms of an underlying financing agreement, UCAR still holds 27.65% of the total issued share capital of CAR.DEFAULT RISKSMoody’s said its downgrade to Caa1 reflected the breadth and severity of the shock on CAR, and the broad deterioration in credit quality and shifts in market sentiment it has triggered.
It said the challenges facing CAR’s substantial shareholder, UCAR, along with the misconduct at Luckin, are elevating the company’s risks in terms of funding access, change of control and default. CAR’s debt maturities over the 12 months ending March 31 2021 total about Rmb5bn–Rmb6bn, including Rmb1.0bn Panda bonds puttable in April 2020 and US$300m notes due in February 2021, according to S&P.US-listed Luckin on April 2 said it had suspended chief operating officer Jian Liu and employees reporting to him after an internal investigation found that he may have fabricated sales totalling about Rmb2.2bn from the second quarter of 2019 to the fourth. Liu held positions at CAR before he joined Luckin.CAR’s shares were suspended from trading on April 3 after they plunged as much as 72% in morning trading, while the cash price of its two outstanding dollar bonds fell more than 25 points.
The shares resumed trading on April 7 and jumped 34% to close at HK$2.63 after CAR stressed in a stock exchange filing that it does not hold any Luckin shares or engage in any business with the company. It also said its financial statements were in “full compliance” and that its relationships with financial institutions and its operations remained normal. But the shares slumped again on April 9 after news of UCAR’s disposal. They closed down 7.8% to HK$2.01. CAR’s 6.00% 2021s were unchanged at 49.00/49.50 and its 8.875% 2022s at 35.00/36.50 on April 9 afternoon, according to Refinitiv data
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