A forensic financial expert broke down the numbers behind scandal-hit German fintech Wirecard, whose ex-CEO was just arrested

  • German payments group Wirecard is in the middle of a swirling scandal after over $US2 billion went missing from its balance sheet.
  • The scandal intensified when ex-CEO Markus Braun – who only left the company on Friday – was arrested Monday night.
  • A financial forensics team at the Centre for Financial Research and Analysis (CFRA) noted that Wirecard’s remaining balance is equivalent to about the same amount it lost.
  • Earlier, Wirecard stated that in case it was unable to publish its full year 2019 and first quarter 2020 results by June 19, then around $US2 billion worth of loans to the company could be terminated.
  • The research team found that as the company’s remaining balance is tied to regulated entities, it does not have ease of access to the $US2 billion in cash.
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German fintech group Wirecard saw its shares crash by over 80% over two days last week when its auditor EY said it could not trace 1.9 billion euros ($US2 billion) in cash, representing roughly a quarter of its balance sheet.

On Monday, Wirecard claimed the missing amount likely never existed, and by Tuesday, former CEO Markus Braun had been arrested in Germany, suspected of inflating the company’s balance sheet.

Wirecard admitted last week that if it is unable to produce a set of new financials by the end of this week, it will have to terminate around $US2 billion of loans it has received.

Speaking to Markets Insider, Richard Sbaschnig, the head of the financial forensics research team at investment firm CFRA, said that Wirecard now faces a liquidity crunch because it would struggle to find the funds to pay back these loans.

“There are typically regulatory restrictions on accessing this cash for general corporate purposes,” Sbasching told CNBC in a separate interview.

Here are a few key points from Markets Insider’s conversation with Sbaschnig about the state of Wirecard’s finances:

  • KPMG, the auditor that conducted Wirecard’s past forensic accounting reviews, previously flagged a trustee account with about 1 billion euros ($US1.2 billion) in it as having “insufficiently documented payments.”
  • Over the span of 2010-2019, Wirecard’s cash flow from operations accumulated about 2 billion euros ($US2.3 billion). This implies the missing 1.9 billion euros potentially wiped off nearly a decade of its reported cash generation and could evoke “tight liquidity” for the company.
  • As of September 30 2019, the fintech group’s total cash, interest-bearing securities, and fixed deposits totalled 3.8 billion euros ($US4.3 billion). Out of this amount, if 1.9 billion euros remains unaccounted for, this leaves a remainder of only 1.9 billion euros of potential available liquidity.
  • The balance is still less than the 2 billion euros worth of loans that Wirecard said could be terminated in case it was unable to produce audited financial results, which it has now withdrawn. It remains unclear if these loans would be due for repayment immediately.
  • Further complicating Wirecard’s cash position is that as of September last year, 1.7 billion euros ($US1.9 billion) of cash was held at regulated entities – Wirecard Bank, Germany and Wirecard Card Solutions, UK. This amount equates to nearly all of the remainder cash balance.
  • Typically, regulatory restrictions obstruct ease of access to cash for general corporate purposes, meaning that Wirecard would likely struggle to use these funds to repay any loans.

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One suggestion floated for Wirecard in recent days is that it could be taken over by another firm.

Although the fintech space is generally buzzy with merger activity, Sbasching said there are complications related to a potential external rescue for Wirecard:

  • According to KPMG’s audit of the company’s filings, 100% of Wirecard’s profits are linked to three third party businesses – cardSystems Middle East, Wirecard UK & lreland, and Wirecard Technologies.
  • The “lion’s share” of profits, therefore, were generated only by these three companies as of 2016, after which its profitability remained limited with negative reported earnings in full-year 2018.
  • Wirecard does not have licences to function in many of the markets it operates out of, and instead uses these third-party firms.
  • Lastly, Wirecard is known to have a sizeable amount of business from certain areas of the market (such as gambling, or smaller Asian firms) that some companies in the payments space tend to avoid.

Earlier, the firm reportedly claimed its missing cash was meant to be held in two banks in the Philippines. The central bank of the Philippines denied this, and said documents suggesting this is the case were fake.

“The initial report is that no money entered the Philippines and that there is no loss to both banks,” central bank governor Benjamin Diokno said, according to Deutsche Welle.

Wirecard did not respond to a request for comment by Markets Insider.

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