Wirecard’s wild week finally ends in insolvency filing

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Wirecard AG filed for insolvency, the culmination of a stunning accounting scandal that led to the arrest of its CEO and left the German payment-processing firm unable to find over $2 billion missing from its balance sheet.

Wirecard management cited over-indebtedness as the reason behind the decision to seek court protection in Munich, according to a statement. The company also said it’s considering whether the insolvency proceedings should be applied to its subsidiaries.

Wirecard said it was unable to come to an agreement with lenders and was now facing the likely termination of 800 million-euros worth of loans on June 30 and that of another 500 million-euros loan on July 1.

“With this step, Wirecard AG wishes to protect the appropriate interests of all parties involved with the company, including creditors, customers and employees,” the statement read.

Wirecard Bank is not included in the proceedings, the company said in the statement. German regulator BaFin has already appointed a special representative to oversee the bank and “the release processes for all payments of the bank will be located exclusively within the bank and no longer at Group level.”

Until earlier last week, Wirecard was still a hot growth story that had shaken off allegations of accounting fraud. Then came the admission that 1.9 billion euros of company funds had gone missing. Shares and bonds collapsed and in less than a week, the company once hyped as the future of German finance saw its CEO Markus Braun resign and then be arrested in an accounting-fraud probe, after almost two decades at the helm of the company. Braun has since been released on bail.

Wirecard’s shares plunged further on Thursday, dropping 80% to 2.50 euros in Frankfurt after trading resumed. Its 500 million euros of bonds due 2024 fell 6 cents on the euro to a record low of 12 cents, according to data compiled by Bloomberg.

Lengthy process

The insolvency proceedings now leave Wirecard’s creditors facing lengthy negotiations with court-appointed administrators over how much they’ll get back out of the money they’re owed. Banks who lent to Wirecard, including Commerzbank AG, ABN Amro, LBBW and ING, have been demanding more clarity from the company in return for the extension of almost $2 billion in debt.

Holders of 1.4 billion in euro bonds and convertible debt also stand in line to try to recoup at least a potion of their money. The company’s euro notes due in 2024 traded at a record low of just 12 cents on the euro on Thursday.

The banks hired FTI Consulting and Allen & Overy as advisers. Wirecard has retained Houlihan Lokey Inc.

The insolvency also raises questions on the future of Wirecard’s licenses. The company has licenses with Visa, Mastercard and JCB International, through which its banking arm issues credit cards. If Wirecard is unable to find the missing cash, Visa and Mastercard may have cause to revoke the licenses.

“The big question is whether they retain the Visa and Mastercard licenses,” Neil Campling, analyst at Mirabaud said. “Without those they have no business.”

Proper review

For Germany, the affair represents an embarrassment. While the country has seen the likes of airline Air Berlin and renewable-energy firm Solarworld file for insolvency in past years, critics say that Wirecard’s troubles could have been spotted earlier.

Wirecard’s spectacular fall from grace is the first for a DAX30-listed company. In terms of assets, its insolvency has the potential to rank below under only those of giant retailer Arcandor AG and manufacturer Babcok Borsig IG, which collapsed in 2009 and 2002 respectively.

Germany’s financial regulator Bafin has come under intense pressure for its handling of the scandal and the company’s collapse is already prompting calls for a parliamentary inquiry into the government’s responsibility.

Fabio de Masi, a member of the German Bundestag said, “if the biggest stock market crash in German history can take place under the eyes of the Bafin, then heads must roll. Should Felix Hufeld, the head of BaFin, not be able to dispel doubts about the supervision, it is questionable whether he can remain head of the supervisory authority.”

— With assistance from Karin Matussek, Steven Arons, Nicholas Comfort and Birgit Jennen

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