'The money's gone': Wirecard collapses owing $4 billion

[June 25, 2020]  By Douglas Busvine, Jörn Poltz and Arno Schuetze

BERLIN/MUNICH/FRANKFURT (Reuters) - Wirecard collapsed on Thursday owing creditors almost $4 billion after disclosing a gaping hole in its books in Germany's worst accounting scandal.

The implosion of the payments company came a week after auditor EY refused to sign off its 2019 accounts, forcing out Chief Executive Markus Braun and leading Wirecard to admit that $2.1 billion of its cash probably didn't exist.

Wirecard is the first member of Germany's prestigious DAX stock index to go bust, less than two years after it commanded a spot among the country's biggest 30 listed companies with a market valuation of $28 billion.

Its demise leaves creditors with scant hope of getting back the 3.5 billion euros ($3.9 billion) they are owed, a source close to to the matter said. Of that amount, Wirecard has borrowed 1.75 billion from 15 banks and 500 million from bond investors.

"The money's gone," said one banker. "We may recoup a few euros in a couple of years but will write off the loan now."

The collapse of Wirecard, once one of the hottest financial technology companies in Europe, dwarfs other German corporate failures. Drilling machines maker Flowtex inflicted losses of more than 2 billion euros in the 1990s while container firm P&R cost investors some 3 billion euros in 2018.

Wirecard shares, which were suspended ahead of the announcement, crashed 80% when trading resumed. They have lost 97% since auditor EY questioned its accounts last Thursday.

EY has audited Wirecard's accounts for more than a decade.

BEATEN TO THE PUNCH

Wirecard said in a short statement that its new management had decided to apply for insolvency at a Munich court "due to impending insolvency and over-indebtedness". It said it was evaluating whether to file for insolvency for its subsidiaries.

A second source close to talks with creditors said that although the company had a healthy core, about two-thirds of sales had been faked in its accounts.

"There is no way that they could repay their total debt of 3.5 billion euros with that core, notwithstanding all the legal challenges ahead of them," the source said on condition of anonymity.

The headquarters of Wirecard AG, an independent provider of outsourcing and white label solutions for electronic payment transactions is seen in Aschheim near Munich, Germany April 25, 2019. REUTERS/Michael Dalder

A third source said the banks were completely shocked that Wirecard had sought insolvency - beating creditors who were thinking of calling in their loans to the punch.

"We thought that Wirecard was a trustworthy company run by people who knew what they are doing," the person said, comparing the saga to the collapse of U.S. energy trader Enron.

The ascent of Wirecard, which was founded in 1999 and is based in a Munich suburb, was dogged by allegations from whistleblowers, reporters and speculators that its revenue and profits had been pumped up through fake transactions.

Braun fended off the critics for years before finally calling in outside auditor KPMG late last year to run an independent investigation.

KPMG, which published its findings in April, was unable to verify 1 billion euros in cash balances, questioned Wirecard's acquisition accounting and said it could not trace hundreds of millions in cash advances to merchants.

"Today is a complete vindication for those that exposed the fraud," said Fraser Perring, who bet on a fall in Wirecard's shares and co-authored a 2016 report that alleged fraud.

The Munich prosecutor's office, which is already investigating Braun on suspicion of misrepresenting Wirecard's accounts and of market manipulation, said: "We will now look at all possible criminal offences."

Braun has been freed on bail of 5 million euros and remains a suspect. Former chief operating officer Jan Marsalek is also under suspicion and believed to be in the Philippines, according to justice officials there.

(Additional reporting by John O'Donnell and Hans Seidenstuecker; Writing by Douglas Busvine; Editing by Maria Sheahan and David Clarke)

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