The stock market suffered some more volatility on Tuesday, as major benchmarks were largely mixed. Gains for the S&P 500 (^GSPC 0.52%) and the Nasdaq Composite (^IXIC 0.90%) slowly faded throughout the course of the session, while the Dow Jones Industrial Average (^DJI 0.12%) lagged behind with the largest loss on a percentage basis. Small-cap stocks saw much greater pressure, with one key benchmark there falling almost 2%.
A lot of investors have been looking for potential turnaround plays in the hopes that a recovery from the COVID-19 pandemic will lift the prospects of some beaten-down businesses. Yet some comebacks don't necessarily have much if anything to do with the pandemic. On Tuesday, shares of Luckin Coffee (LKNC.Y 0.10%) moved sharply higher on hopes that the Chinese coffee chain will be able to emerge from its long challenges and prove to be a viable business again for international stock investors.
A quick history of Luckin Coffee
For those who aren't familiar with Luckin Coffee, it emerged as a potential competitor to Starbucks in the red-hot Chinese consumer market. Shares soared from its 2019 IPO to hit a peak around $40 per share as Luckin reported impressive gains in sales and store counts.
However, the bottom fell out from under Luckin in April 2020 following allegations that the company had fraudulently manipulated key financial and business metrics. Subsequent investigations revealed questionable practices, including apparent overpayments for raw materials and inflated revenue figures. High-level executives were implicated, leading to the departure of company leaders like CEO Jenny Qian and COO Jian Liu.
Share prices fell, and in late June, the Nasdaq moved to delist Luckin from U.S. trading. Since then, Luckin's stock has traded over the counter at much lower levels.
Is Luckin back?
On Tuesday, however, shares of Luckin jumped more than 50%. The coffee company announced it had entered into an agreement with key creditors to restructure outstanding debt. That gave shareholders hope that Luckin would be able to avoid more dire consequences.
The agreement certainly didn't come without a cost, though. Under the deal with holders of about 60% of convertible debt with a par value of $460 million, bondholders would be able to trade their debt for a set of replacement securities. Specifically, for every $1,000 in par value and accrued unpaid interest, bondholders could receive the following:
- $320 in cash,
- $230 in the form of a one-year senior secured note paying 9% interest,
- $300 in the form of a five-year senior secured note paying 9% interest,
- and $60 in newly issued Luckin stock.
In addition, if Luckin can persuade investors to buy $50 million in stock, an additional provision would give bondholders the right to convert part of the one-year note into stock at their election.
Luckin warned that the deal is subject to plenty of conditions. Approval from the Chinese government is a prerequisite to the plan working, and the deal will need to get approval in U.S. bankruptcy court.
A good sign, but tread carefully
Moreover, it's important for Luckin shareholders to understand that there will inevitably be some dilution associated with the agreement. Terms didn't specify the price of shares to be issued under the deal, but investors can count on there being a lot more outstanding stock if the agreement goes through.
Many investors are rooting for Luckin Coffee to come back from the brink and reward their patience. Tuesday's announcement is a step in the right direction, but it's too early to declare victory just yet.