How a Chinese tech firm borrowed $2.1 billion in a hurry

  • fast cash
- RYAN McMORROW

Jun 4, 2017-

When a Chinese tech company with global ambitions began to run short of cash last year, it sought billions of dollars from new investors. One of them was a music teacher.

Li Shenghong, who teaches out of a mall storefront in southern China, was already a fan of the smartphones and televisions sold by the company, an internet-and-gadgets conglomerate called LeEco. When LeEco also began selling investment products online, Li snapped them up, even though the company said little about where the money would go.

 “Whenever I have leftover money from my salary, I’ll invest it,” Li said, explaining that he had invested $7,000 in the company. “My spare change? I put it in.”

LeEco, buffeted by rapid expansion, has turned to murky and potentially risky ways to stay afloat, including tapping China’s shadowy informal banking system, which many people believe threatens the Chinese economy. The company courted small investors by promising good rates of return and playing down risks.

All the while, its finances were deteriorating. Even as it continued to raise money, LeEco filled the lobby of its offices with potted plants to keep angry creditors from loitering there.

Economists worry that Chinese companies are borrowing too much money outside the scrutiny of regulators and planting too many potential debt bombs in the corners of China’s financial system. LeEco, a catchall name for a variety of businesses controlled by the internet tycoon Jia Yueting, poses little threat by itself to China’s financial system. But a review of the company’s finances shows the extent of the opaque ways Chinese firms can use to raise money—and how failures could ripple through the system. LeEco began as an online video-streaming company sometimes called the Netflix of China. Today, its many affiliates sell smartphones and TVs, buy up sports programming, peddle financial products and back the Faraday Future electric car business, which is based in Los Angeles and employs 1,400 people.

To borrow more than $2.1 billion since the start of last year, LeEco affiliates have turned to China’s vast but poorly understood informal financial system.

LeEco raised $215 million from selling so-called wealth management products online, according to public data. In China, such investments promise a good rate of return and the illusion of a guarantee, but they offer little disclosure. LeEco listed the products on its app as “low risk.”

LeEco also tapped securities brokerages for money, another murky transaction. Under such deals, the brokerages lend money if a borrower puts up shares as collateral. Those loans stay off the books of the formal banking system, making risks difficult to track. They can also sour quickly if shares plunge in value, a real possibility in China’s stock market. According to the latest available data, Jia has pledged 97 percent of his shares in LeEco’s main publicly traded arm, Leshi Internet, to back loans primarily from securities brokerages. In November, those loans totaled $1.7 billion. Venturing into other corners of China’s financial system, LeEco has raised $2.4 billion since last year by selling shares or debt convertible into shares in its various privately owned affiliates. Because those businesses are not publicly traded, they get less scrutiny from Chinese securities regulators than companies that sell shares on a public stock market.

LeEco says it is on the mend, citing a $2.2 billion injection in January from a Chinese real estate developer. At an investor meeting in May, Jia acknowledged that layoffs and asset sales were underway but said the moves would “allow our core operations, especially the nonpublic businesses, to enter a fast-paced recovery period.”

Jia’s commitment has reassured a number of investors, including Hu Yenan, who has formed a company to bring people together and pour money into the conglomerate’s various businesses.

One partnership Hu formed bought into a $1.08 billion offering of debt convertible into shares in LeEco’s electric car start-ups, Faraday Future and LeSee. Jia, he noted, had personally guaranteed the debt.

 “If Warren Buffett comes to you asking for money, would you lend to him?” Hu asked. “Of course you would.”

—©2017 THE NEW YORK TIMES

Published: 04-06-2017 09:41

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