Luckin Coffee (NASDAQ:LKNCY) just announced that it might exit bankruptcy if it can raise capital and secure an agreement to a new restructuring deal. This came to light in an announcement by the company on Mar. 16. It was a very important release since it had some good news for Luckin stock owners.
This may explain why Luckin stock has been doing well recently. Since Mar. 16, LKNCY is up about 50%.
Restructuring Agreement and Capital Raise
Buried deep in the press release was some really good news. Management said that it was in discussions with an investor group. They are interested in putting up $250 million to invest in the new equity in the company.
There was no indication at what price this investment would be made, nor whether the deal was agreed to yet. But it shows that at least one large institutional investor believes in the company.
Moreover, a majority of the company’s $460 million in convertible notes will vote to restructure their obligations. They will receive about 32% of their old notes in cash, and the rest in either new notes or Luckin stock ADRs (American depository receipts). (Remember, this is a Chinese company based in the Caymans but listed with ADRs on NASDAQ.)
However, this does not allow investors now to know how well the company has done during 2020. Nor do we know the exact amount of cash and liquidity the company has nor the number of shares outstanding.
The Joint Provisional Liquidators (JPL) had already provided on Dec. 17 an update in their report for activities up until Sept. 30, 2020. For example, the report said that the company was already profitable on a store level as of August 2020. It is also forecast to be free-cash-flow positive by the first half of 2023.
The company now says it has a new management team and is on track with its growth strategy. Recently, the new Chairman and CEO, Dr. Jinyi Guo, was cleared of any misconduct by an internal special panel of the Board. This should allow Luckin Coffee to pass another hurdle on its way to raising further capital and producing up-to-date financial statements.
What to Do With Luckin Stock
No major brokerage firm presently covers Luckin Coffee. Most reports are from over a year ago, so they are out of date.
The company has filed for Chapter 15 bankruptcy protection. This is a filing that permits foreign companies to file for bankruptcy in the U.S. court system. It does not appear to be a liquidation-type bankruptcy, but a restructuring, as explained above.
However, it still has to go through the court system. That may cause some delays to the capital raise, even if all the parties are in agreement.
But let’s not worry about that. I would assume, if you are willing to take some risks, that the company will raise the capital it disclosed in the Mar. 16 release. It is hard to say how high that will push Luckin stock. But I believe it will be substantial.
However, potential investors should be cautious. For one, we don’t know what the present capitalization table for the company really is. The business may be going great, but if the $250 million investors demand a huge stake in the company, it could substantially dilute shareholders.
For example, there is really no way to positively identify the actual number of shares outstanding until the company releases its recent financial performance statements. In addition, if the new capital investors want a large stake — say, 50% — in the company, it will substantially dilute Luckin stock. That could mute the expected rise in the stock price if the deal is signed.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.