(Bloomberg Opinion) -- Following Wirecard AG’s confirmation on Monday that 1.9 billion euros ($2.1 billion) of the cash it reported probably doesn’t exist, the question arises whether the German electronic-payments group will survive in its present form.
Even if Wirecard can avoid a liquidity crunch, there’s the issue of whether a fintech can hang onto its customers and partners after revealing such an epic failure of internal controls and risk management. The company authorizes and processes electronic payments for both business clients and consumers, so trust is essential. New boss James Freis will have to keep creditors at bay, and overhaul a rotten corporate culture.
The stock has plunged 85% in the three days since Wirecard’s auditor, Ernst & Young, said roughly fourth-fifths of the net cash reported in the last audited accounts couldn’t be verified. Chief Executive Officer Markus Braun resigned, yet the company is still capitalized at almost 2 billion euros ($2.2 billion). Shareholders think there’s still some value to be salvaged.
Wirecard is exploring various restructuring measures and disposals to make sure it can keep the lights on. Yet potential acquirers will worry if there are any more nasties still to be found and what the quality of the underlying technology is really worth — the large profits it reported previously are open to considerable doubt. At the very least it might want to consider changing the company name, which has become a byword for corporate and regulatory failure. That’s a suggestion from Citigroup analysts too.
Still, a glance at Wirecard’s bonds doesn’t suggest much confidence in Freis’s rescue mission. The 500 million euros of senior unsecured debt is priced at just 26 cents on the euro — the bond market’s way of saying, “Abandon hope all ye investors who enter here!” It’s not just bondholders who are sweating. The lending banks will be too. Wirecard has a 1.75 billion-euro revolving-credit facility that’s now about 90% drawn, according to Bloomberg News.
Because Wirecard failed to publish its annual report, the lenders have the right to call in their loans, but they haven’t so far. Keeping the company going will improve their chances of recovery.
Unfortunately, as a financial technology company, Wirecard isn’t exactly flush with hard assets to sell. Some of its most valuable assets are customer relationships. The more transactions Wirecard processed, and the more customers it added to its financial platform, the more the business was worth in the eyes of investors.
There’s a danger now that that unless it can quickly engineer a sale, Wirecard’s partners will desert the company because of the financial and reputational risks of maintaining a relationship. Mirabaud Securities’ Neil Campling, one of the few analysts to warn about its business, says there’s a chance credit card companies could decide to stop working with Wirecard after its compliance failures.
The same is true of the company’s blue-chip clients. While Wirecard’s origins were in servicing payments for gambling and porn websites, it has nurtured relationships with more august consumer names such as Ikea and Swatch. There are other providers of similar digital payment services, so Wirecard is by no means irreplaceable.
There’s a danger too that the customers of Wirecard Bank, the company’s German deposit-taking arm, withdraw some funds. Wirecard held about 1.7 billion euros of such deposits as of September 30th. The first 100,000 euros of customer cash are protected in Germany by deposit insurance, which might offer some protection. It’s questionable, though, whether regulators can continue to regard Wirecard as a responsible owner.
Even if its lending banks show patience and customers remain loyal, the company will probably be hit by an avalanche of litigation. And its corporate culture will also be difficult to reform. It was aggressive in defending itself against accusations of fraudulent accounting. Yet it was the company that misled the market, not journalists or short sellers. (Braun has always denied wrongdoing.)
Anyone who’s read the Financial Times’s extensive reporting on the company will see that the troubles run deep. KPMG’s special audit, published in April, couldn’t verify much of Wirecard’s historic revenue and profits. The question isn’t just whether Wirecard can survive, but whether it should.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
©2020 Bloomberg L.P.