Lu Zhengyao
Before the accounting scandal and the stock crash and the defaulted loans, Luckin Coffee Ltd.’s billionaire founder Lu Zhengyao was an ideal customer for Credit Suisse Group AG.
“I’ve had I don’t know how many dinners with him in Beijing and he’s absolutely the poster child for what we want to do,” Tidjane Thiam said at a conference last year when he was still head of the bank. He lauded Lu’s relationship with the firm that ranged from private banking to stock sales. “He’s a dream client.”
Luckin’s dramatic fall from grace this month blindsided some of the top names in global finance but few have seen a bigger fallout than Credit Suisse. The lender lost a high-profile Hong Kong IPO in the wake of the scandal and reported a five-fold increase in loan-loss provisions at its Asia Pacific unit, primarily due to a default by Lu. The bank is conducting an internal review of the case, and scrutiny on loans to Chinese companies has increased, according to people familiar with the matter who declined to be identified discussing private matters.
While Lu hasn’t been accused of wrongdoing, Luckin’s revelation that senior executives may have fabricated $310 million in sales underscores the risk for investment banks of doing deals in China, following a series of accounting scandals. The world’s second-biggest economy is core to Credit Suisse’s strategy to win business from rich entrepreneurs across Asia.
“Luckin is a microcosm of what can happen when weak underwriting standards are allowed to persist in the pursuit of rapid growth,” said Mark Williams, a professor at Boston University and a former U.S. Federal Reserve bank examiner. “Luckin exhibited many signs of a high-growth, high-risk business.”
Credit Suisse wasn’t the only firm caught out by the scandal at Luckin, whose offices were raided this week by Chinese regulators. Luckin’s early investors included global giants such as GIC Pte., the Singapore sovereign wealth fund. Morgan Stanley was part of the IPO group and provided some of the margin loans to Lu, as did Barclays Plc, among others. Morgan Stanley, Credit Suisse and the other IPO banks face an investor lawsuit after Luckin’s 91% collapse from its January high.
Morgan Stanley, Barclays, and GIC declined to comment.
Aside from the deals, the bank has other connections to the retailer. Luckin Chief Financial Officer Reinout Hendrik Schakel worked for eight years as an analyst and investment banker for Credit Suisse in Hong Kong until 2016. And Lu’s daughter Nancy works for Credit Suisse in Hong Kong in a role unrelated to the Luckin account, according to people familiar. She didn’t respond to phone calls and text messages, while the bank declined to comment.
Given those links, Luckin’s downfall has hit Credit Suisse harder than others. Due to the scandal, the firm was dropped from a $500 million IPO in Hong Kong for WeDoctor, the health-care startup backed by Tencent Holdings Ltd., according to people familiar. The bank has also increased scrutiny on Chinese loans in the wake of the collapse and the pandemic, people familiar said. It ended talks on joining a $1.5 billion loan to Melco Resorts and Entertainment Ltd., a U.S.-listed Macau casino operator hit hard by virus, after the financing failed to get internal approval, they said. A spokeswoman at Melco declined to comment. MDT/Bloomberg
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