Why Is Beijing Bailing Out Car Inc.?

(Bloomberg Opinion) -- Famed investor Carl Icahn couldn’t save an American emblem, Hertz Global Holdings Inc. So why does a Beijing-backed enterprise think it can rescue China’s largest car rental company?

With its prospects for fresh capital dimming, Car Inc., which shares a chairman with scandal-hit Luckin Coffee Inc., says it’s selling a stake to Beijing Automotive Group Co., the Chinese joint venture partner for Daimler AG-owned Mercedes-Benz and Hyundai Motor Co. BAIC plans to buy up to 21.26%, or a maximum 450.8 million shares, the entire ownership of parent UCAR Inc. That would make the state-owned entity the second-largest shareholder behind Legend Holdings, parent of computer maker Lenovo Group Ltd. Another agreement that was in the works between UCAR and a vehicle linked to private equity giant Warburg Pincus LLC will be terminated.

Investors cheered Monday’s news, with the stocks and bonds rising from near rock-bottom. The sale would help sever ties between Car Inc. and Luckin and, in theory, reduce further fallout from the scandal engulfing the coffee chain and Chairman Charles Lu Zhengyao that has riled regulators. But the rescue doesn’t make much strategic or financial sense for either Car Inc. or BAIC.The last thing BAIC needs in the current auto market, which was sagging even before the pandemic, is the stress of a troubled rental company and all the strings attached. The auto giant’s first-quarter results showed that net profit declined 95% on year. The local Beijing brand posted a loss of 1.4 billion yuan ($196 million). Mercedes-Benz was better off because premium-segment demand has held up. Sales volume halved on the Hyundai side. BAIC is already playing rescuer elsewhere, bolstering dealerships with financial support like payable extensions, interest waivers and higher subsidies.What BAIC will — or can — do for Car Inc. through such an arrangement is unclear. The company may end up being a sink for BAIC. The rental business relies heavily on financing and needs capital with high costs on vehicle acquisitions and other such operations. UCAR, the parent, has also been a source of revenue for Car Inc. through fleets; what happens to those relationships once ties are cut will be in doubt. Car Inc. has to deal with the residual value of its cars because in China, manufacturers don't offer guaranteed depreciation or repurchase programs. The company also has guaranteed subsidiary borrower loans onshore along with other shadow financing arrangements. It will be on the hook if there are any defaults. The rental company’s future, with or without a savior, was already up in the air. Moody’s Investors Services expects its leverage ratio to rise over the next 12 months as revenues and demand fall. The cancelled sale of the second tranche of shares to Warburg would have made the firm Car Inc.’s largest shareholder, and could have eased worries about governance and capital shortages, according to S&P Global Intelligence. UCAR sold the first portion — a 4.65% stake — in April to the U.S. firm.

This raises several questions for Car Inc. bondholders should BAIC eventually buy the entire stake. UCAR had pledged the shares as collateral for some loans last June. Now, there’s the risk of a change of control event and accelerated debt repayments. Any modifications to the ownership, that is, if the cumulative stakes of major shareholders fall below a 35% threshold, would trigger the clause.

There are other considerations. Does Daimler want a part of this? The German company owns 30% of BAIC’s Hong Kong-listed shares. The stake sale, if completed, could open it up to the risk of helping Car Inc. That may weigh on its Chinese partners’ financial standing domestically if Daimler is pushed to support the rental firm’s business.

It’s one thing to bail out a good company with a bad balance sheet. But Beijing’s modus operandi of rescuing all companies and banks lands it just where it doesn’t want to be: holding the bag for many bad actors. Consider this: In March last year, UCAR took a 67% stake in an entity related to BAIC through a complicated transaction. It still hasn’t fully paid back the equity portion, according to local media reports. It also owes principal and interest payments. Perhaps this is the way in to get some money back? Either way, this bailout looks wrong.

The imminent arrival of a white knight does little in the way of reorganizing or fixing this business; it just shifts around liabilities and a web of ties. Investors shouldn’t rejoice too soon.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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