The house of cards has well and truly collapsed for Wirecard, the German payments company that has been accused of accounting fraud. Today it announced that its German operation Wirecard AG was applying for insolvency proceedings in a Munich court, the Amtsgericht München, due to “impending insolvency and over-indebtedness.” It also issued a separate statement that elaborated to note that “the company’s ability to continue as a going concern is not assured” after it was unable to reach a deal with lenders over loans coming due on June 30 and July 1, respectively for €800 million ($896 million) and €500 million ($560 million).
It also said it hopes to restructure under temporary bankruptcy measures, and in the meantime Wirecard Bank AG would not be part of proceedings. “BaFin [the financial services watchdog] has already appointed a special representative for Wirecard Bank AG. In future, the release processes for all payments of the bank will be located exclusively within the bank and no longer at Group level.”
The collapse comes not just at a time when Wirecard’s own loans are falling due, but we have been facing a global recession due to the global health pandemic: that has had a knock-on effect for a number of industries, and so while some businesses are thriving, others have halted altogether, or slowed down considerably, which will have a direct impact on a company whose business model is set up to make incremental commissions on payments.
The SoftBank-backed, publicly traded business is still determining whether insolvency applications will also need to be filed for subsidiaries of the Wirecard Group: the company provides online and in-person payment services to merchants in other countries — most recently opening a subsidiary in Mexico — with offices in some 28 other locations.
Wirecard’s stock, traded in Germany on the Deutsche Börse Xetra exchange, has today plummeted nearly 77% (after drops in previous days), giving it a market cap of $350 million, an Enron-style collapse. As a point of contrast, when SoftBank invested $1 billion last year, it was worth around $19 billion.
The news brings a sad, but unsurprising, development to an especially rough week for the company, after its auditors (Ernst & Young) discovered a $2.1 billion accounting hole in its books, and then the former CEO, Markus Braun, was arrested on charges of fraud.
Those who have been watching the company for longer than the past week might also recall that all of this has been going on for months, although a separate investigation led by KPMG and published in April determined that “no incriminating evidence was found for the publicly raised accusations of balance sheet manipulation.”
SoftBank, via one of its subsidiaries, SoftBank Investment Advisors, put $1 billion into the company in April 2019 in the form of a convertible bond. That deal was controversial at the time, since Wirecard was already being investigated for meddling with its accounts. SoftBank then converted that investment into a hedging transaction in September 2019. That may have removed its financial exposure, but not the stain it’s put on the company’s investing brand.
That’s something that has taken a major hit in the last year or so. SoftBank’s other deals have included stakes in WeWork and Uber, both now infamous for failing to live up to the stratospheric valuations they accrued through many rounds of funding. Beyond those two, SoftBank has been scrutinised for its track record around other large investments it made out of its $100 billion Vision Fund, with a number of companies (but not all) subsequently going on to restructure to bring down costs after failing to grow as expected. Although the Wirecard deal didn’t come out of the Vision Fund, the bigger picture is not rosy, even as it’s one that SoftBank’s now working to fix.
With Wirecard’s downfall coming as it has to a company that is publicly traded, the payments company has been unable to offset its losses and its financial situation as they have played out on an open forum. The company counts Olympus, Getty Images, Orange and KLM among its customers, but with a number of payment partners available in the wider market — perhaps one reason behind the problems here — it’s going to be worth watching how that customer mix changes in the coming weeks and months.