Stock Market Comment: Wirecard - what happened?

• Wirecard filed to open insolvency proceedings

• Company said €1.9 billion gone missing

• Ex-CEO got arrested

• Major customers are walking away

• Share price drops 98% in 7 days!

Wirecard (WDI.DE), German payments company, is unquestionably the hottest stock of the week. While it is not completely uncommon to see the share price rise or fall dramatically, it rarely happens to companies from blue-chips indices! Wirecard lost over 90% in value over the past week and there are strong fundamental reasons behind the drop.

Financial Times reporting

Story relating Wirecard and questionable accounting practices isn't new - Financial Times issued the first report on Wirecard's misconduct in January 2019 saying that one of the company's senior executives may have inflated sales in Asia-Pacific business units! Payments company firmly rejected any accusations. Subsequent reports on the matter from Financial Times were rejected by the company as well and BaFin, German financial regulator, even banned short selling on Wirecard shares and launched an investigation into possible market manipulation by Financial Times journalists.

Wirecard was seen as a company with sound fundamentals. Revenue and net income was rising robustly in the previous years making investors lose their guard. Source: Bloomberg, XTB

2019 results release delays

Wirecard hired KPMG to carry out an independent audit of its books and 2019 results to alleviate investors' concerns. However, things didn't go as planned and the release of the audit report and results kept being delayed as the auditor said it was unable to acquire all the necessary information. Below is a short timetable of how the 2019 annual report was being delayed.

• Initial date: April 8

• 1st delay: April 30

• 2nd delay: June 4

• 3rd delay: June 18

However, Wirecard failed to release a report on Thursday, June 18 ahead of the session open. Spokesman for the company said that the report will be released over the course of the morning. Investors became jittery but they did not expect a bombshell company offered them… Wirecard said that €1.9 billion has gone missing! To put this figure into context - Wirecard said in a preliminary release that it had around €2.8 billion revenue in whole 2019. Release of the 2019 report was postponed indefinitely and recent earnings reports were withdrawn by the company.

Missing €1.9 billion and CEO arrest

Nightmare of Wirecard's investors became reality as it turned out that Financial Times could have been right since its first report and that the dramatic collapse of Wirecard could have been avoided. Few days after the announcement of a big loop in the company's balance sheet, Wirecard confirmed that €1.9 billion may have never existed. As the company failed to publish its financial reports, covenants were breached and banks got the option to withdraw loans amounting to €2 billion. Markus Braun, CEO and founder of Wirecard, got arrested for market manipulation (disclosure of false financial statements). Wirecard's customers began to drop connections with the German payments processor. In a matter of just one week, Wirecard's reputation was completely ruined and the company began to fight for survival.

Less than 2 years ago, Wirecard was a company with €24 billion market capitalization. However, after a recent epic collapse, it is worth less €350 million now. Source: Bloomberg

Insolvency

Wirecard has appointed James Freis as an interim CEO. Former Chief Compliance Officer of the Deutsche Boerse was expected to try to assure investors and lenders that current downfall isn't terminal and the company can continue to operate on a going concern. It looked like he had some success as lenders agreed to assess Wirecard's long-term position before deciding whether to withdraw loans or not.

However, any glimmer of hope bulls could have left was taken away from them today. Trading on Wirecard shares was suspended shortly after the cash session opened for pending news. Company announced that it has opened insolvency proceedings causing shares to drop to €2.50 after trading resumed - Wirecard traded around €100 just 7 days before.

What's next?

What's next for Wirecard? Insolvency proceedings will pave the way for lenders to recover their capital. There is a small chance that they will allow for restructuring but Wirecard would need to present strong evidence that it can operate as a going concern. This may be tricky as Visa and Mastercard are likely to slash ties with the company in case it fails to find €1.9 billion - those €1.9 billion that Wirecard already confirmed may not exist. Without Visa and Mastercard, Wirecard's credit cards business does not work... and without credit card business, Wirecard has no business at all.

Share price of Wirecard (WDI.DE) has plunged from over €100 to around €2 over the course of 7 days. Following today's insolvency announcement, it looks like company's downfall could be terminal. Source: xStation5