What's behind the wipeout at Wirecard?

Wirecard, the German blue-chip technology group that specialised in payment-processing, has collapsed in scandal. Matthew Partridge reports.

Markus Braun, ex-CEO of Wirecard © CHRISTOF STACHE/AFP via Getty Images
Wirecard's ex-CEO, Markus Braun, faces charges of accounting fraud and market manipulation © Getty
(Image credit: Markus Braun, ex-CEO of Wirecard © CHRISTOF STACHE/AFP via Getty Images)

Markus Braun, who resigned last week as CEO of Wirecard, has now been arrested in Germany on charges of accounting fraud and manipulating the share price, says Simon Foy in The Daily Telegraph. He has been accused by authorities of “portraying Wirecard as financially stronger and more attractive for investors and clients” than it actually was (see story below for details). This comes after Wirecard admitted that €1.9bn (£1.7bn) of cash missing from its balance sheet “probably did not exist”. The company is “now scrambling to stay afloat” and is considering a “massive restructuring”.

The latest revelations have been a disaster for shareholders, who have seen Wirecard’s share price plunge by more than 80% over the past few days, says the Financial Times. But things may get even worse, since the scandal throws into doubt the entire performance of its payment-processing business, which was previously deemed the group’s key source of profits. Despite Wirecard’s talk of cost cuts and asset sales, lenders are unlikely to accept a delay in payments if the company “does not have much of a real franchise that generates real cash flow”. So there is a good chance that equity holders “will be left with nothing”.

Is Wirecard heading for insolvency?

It’s clear that there’s “little chance” of the company paying back creditors from its existing resources, says Liam Proud for Breakingviews. Still, lenders might as well be patient, since calling in the loans immediately “would tip the company into insolvency”. The best solution might be to extend Wirecard’s credit facility, giving the new boss James Freis enough time to “put together a financial rescue plan”.

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Nonsense, says Chris Bryant on Bloomberg. Even if Freis manages to get banks to keep extending credit, there’s the issue of whether Wirecard “can hang onto its customers” after such an “epic failure” of internal controls and risk management. Indeed, the fact that there are “other providers of similar digital payment services” means that the company is “hardly irreplaceable”. Factor in the anticipated “avalanche of litigation” and regulators forcing Wirecard’s bank to close, and its days seems numbered. What’s more, given its behaviour, the question isn’t only “whether Wirecard can survive”, but also “whether it should”.

At least one creditor may have got out in time, says Margot Patrick in The Wall Street Journal. At the start of the year, part of SoftBank Group bought €900m worth of convertible bonds from Wirecard as part of a “strategic partnership”. However, instead of holding onto the bonds, which at the time were seen as providing a “shot in the arm” for Wirecard, it arranged for Credit Suisse to package them up and resell them to third-party investors. The bonds now trade for 12% of face value, “stranding investors and European private banks that bought [them]”.

Wirecard: the meteoric rise and fall of a fintech

The ongoing scandal is the latest chapter in the story of financial technology company Wirecard, says Kevin Granville in The New York Times. Wirecard was founded in 1999 and flourished in recent years as a provider of digital-payment services, prospering by “making contactless payments seemingly effortless for hundreds of thousands of merchants”. Customers included Apple Pay, Google Pay and Visa.

Praised as a “homegrown technology success” in Germany, it was propelled into Frankfurt’s blue-chip stock index, the DAX, in 2018. However, the very same year, Wirecard’s “meteoric rise” came to a halt, says the Financial Times. This is because an investigation by the FT examined its “suspected use of forged contracts”, while a report by a top law firm found “evidence suggesting Wirecard’s employees engaged in a pattern of book-padding and made up partners that couldn’t be found” to inflate profits and revenues. Last year Singaporean authorities raiding its Asian offices. The final straw came earlier this month, with banks in the Philippines, the supposed location of Wirecard’s “missing funds”, confirming that the company “was not a client”.

Wirecard’s collapse is a “vindication” for short-sellers, who have been questioning its accounting for years only to be threatened with lawsuits for “defamation”, say Paul Davies and Juliet Chung in The Wall Street Journal. It hardly helped that in 2019 Germany’s financial regulator BaFin took the“unusual step of banning short-selling against the company”.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri