Short sellers pile pressure on Wirecard despite high fees
23 June 2020 Berlin
Image: Shutterstock.com
Short sellers eyeing the scandal-ridden German fintech firm Wirecard had to stump up borrows costs of between 12-15 percent earlier this month, as accusations of accounting inconsistencies and fraud intensified.
Last week saw the beleaguered payment processing provider’s shares downgraded to junk level by Moody’s as the Wirecard faces tough questions around allegations of misplacing, or imagining, nearly €2 billion in assets somewhere in South East Asia, according to reports.
The firm’s CEO Markus Braun was among the senior management to resign last week and local media reports indicate that he was arrested today after handing himself in to police on Monday evening.
Meanwhile, IHS Markit Securities Finance Intraday service showed that borrow costs have been volatile in recent weeks, costing 12 percent on 17 June and increasing to 15 percent 18 June.
The spike in costs was in part caused by 11 million WDI shares being removed from lending programmes between 27 April to 15 May, according to Sam Pierson, IHS Markit’s securities finance director.
As of last week, there were around 10.7 million of WDI shares being short sold.
Unsurprisingly, the demand to borrow, which started to grow in early 2020, has increased in lockstep with the mounting evidence of unsavoury business practices at the German firm.
The scale of Wirecard equity borrowing is substantially larger than that observed for the firm’s 0.5 percent note due in September 2024, Pierson adds, however, the intensity of borrowing at issuance was notable.
The cost of borrowing the credit trended higher from issuance before settling between 20-25 percent annualised fee, an exceptional cost of borrowing reflecting a lack of borrow availability set against elevated borrow demand, he explains.
The increase in borrow cost for the Wirecard bond almost single-handedly pushed up the year-the-date index level lending return for the iBoxx EUR Corporates index.
A brief history of Wirecard short interest
Short sellers have expressed a negative view on the valuation of Wirecard shares for more than a decade, Pierson notes.
The all-time peak in the number of shares on loan was 30 million, observed in May 2016; at the time the shares traded at a price of €40/share, for a total of €1.2 billion on loan.
The short position was unwound as WDI shares trended toward an all-time high price of €194 on 28 August 2018, at which time the 600,000 shares on loan had a value of €116 million.
Over the past two years, the share price and shares on loan have fluctuated widely, Pierson explains, settling at a share price of €104.5 on 17 June, with the 22.1 million shares on loan worth just over €2.3 billion; the largest WDI equity loan balance on record was €3.8 billion observed on 13 February 2020.
Elsewhere, the recent allegations, inspired by reports into Wirecard’s accounting discrepancies by the Financial Times investigative team, are expected to lead to soul searching by the German regulator, BaFin, which has played a central role in the still-unfolding drama.
In February 2019, the German market authority imposed a two-month ban on short selling of Wirecard shares, in what is believed to be the first instance of such a stay being enacted outside of a financial crisis.
The ban elicited widespread condemnation by market participants at the time, with Fahmi Quadir, founder and CIO of Safkhet Capital Management, calling it “bizarre” and “backwards” in an open letter to the German regulator.
At the time, BaFin claimed the ban was justified in order to counter “existence of specific adverse situations or circumstances that constitute a serious threat to market confidence in appropriate price determination in Germany”.
However, in light of recent insights into what has been described as a campaign to discredit short sellers and negative media reports into Wirecard’s mismanagement, the foundation for this argument appears to be under threat.
Last week saw the beleaguered payment processing provider’s shares downgraded to junk level by Moody’s as the Wirecard faces tough questions around allegations of misplacing, or imagining, nearly €2 billion in assets somewhere in South East Asia, according to reports.
The firm’s CEO Markus Braun was among the senior management to resign last week and local media reports indicate that he was arrested today after handing himself in to police on Monday evening.
Meanwhile, IHS Markit Securities Finance Intraday service showed that borrow costs have been volatile in recent weeks, costing 12 percent on 17 June and increasing to 15 percent 18 June.
The spike in costs was in part caused by 11 million WDI shares being removed from lending programmes between 27 April to 15 May, according to Sam Pierson, IHS Markit’s securities finance director.
As of last week, there were around 10.7 million of WDI shares being short sold.
Unsurprisingly, the demand to borrow, which started to grow in early 2020, has increased in lockstep with the mounting evidence of unsavoury business practices at the German firm.
The scale of Wirecard equity borrowing is substantially larger than that observed for the firm’s 0.5 percent note due in September 2024, Pierson adds, however, the intensity of borrowing at issuance was notable.
The cost of borrowing the credit trended higher from issuance before settling between 20-25 percent annualised fee, an exceptional cost of borrowing reflecting a lack of borrow availability set against elevated borrow demand, he explains.
The increase in borrow cost for the Wirecard bond almost single-handedly pushed up the year-the-date index level lending return for the iBoxx EUR Corporates index.
A brief history of Wirecard short interest
Short sellers have expressed a negative view on the valuation of Wirecard shares for more than a decade, Pierson notes.
The all-time peak in the number of shares on loan was 30 million, observed in May 2016; at the time the shares traded at a price of €40/share, for a total of €1.2 billion on loan.
The short position was unwound as WDI shares trended toward an all-time high price of €194 on 28 August 2018, at which time the 600,000 shares on loan had a value of €116 million.
Over the past two years, the share price and shares on loan have fluctuated widely, Pierson explains, settling at a share price of €104.5 on 17 June, with the 22.1 million shares on loan worth just over €2.3 billion; the largest WDI equity loan balance on record was €3.8 billion observed on 13 February 2020.
Elsewhere, the recent allegations, inspired by reports into Wirecard’s accounting discrepancies by the Financial Times investigative team, are expected to lead to soul searching by the German regulator, BaFin, which has played a central role in the still-unfolding drama.
In February 2019, the German market authority imposed a two-month ban on short selling of Wirecard shares, in what is believed to be the first instance of such a stay being enacted outside of a financial crisis.
The ban elicited widespread condemnation by market participants at the time, with Fahmi Quadir, founder and CIO of Safkhet Capital Management, calling it “bizarre” and “backwards” in an open letter to the German regulator.
At the time, BaFin claimed the ban was justified in order to counter “existence of specific adverse situations or circumstances that constitute a serious threat to market confidence in appropriate price determination in Germany”.
However, in light of recent insights into what has been described as a campaign to discredit short sellers and negative media reports into Wirecard’s mismanagement, the foundation for this argument appears to be under threat.
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