New Wirecard CEO Has Few Days to Calm Nervous Investors

(Bloomberg) -- James Freis took charge of Wirecard AG on Friday following the shock announcement that Markus Braun had resigned as chief executive officer. The question he faces on Monday is what, if anything, he will be able to salvage of the payment company.

Braun’s position became untenable following revelations that about 1.9 billion euros ($2.1 billion) -- or two-thirds of the company’s 2019 revenue -- had gone missing. The two Asian banks that were supposed to be holding the money denied any business relationship with Wirecard and the company subsequently withdrew its fiscal 2019 and first-quarter 2020 financial results after saying those funds on its balance sheet probably don’t exist.

The chaos has shaved about 85% off Wirecard’s market value over just three trading days. As interim CEO, Freis has to convince investors that the collapse isn’t terminal.

He has some relevant experience. He began his career as an attorney at the Federal Reserve Bank of New York. After a spell as director of the U.S. Treasury Department’s Financial Crimes Enforcement Network, where he was responsible for the regulation of financial institutions, he spent 6 years at Deutsche Boerse AG, most recently as chief compliance officer.

Freis wasn’t meant to start at Wirecard until July. He also wasn’t meant to be running the company -- last week, he was supposed to be getting ready to run a new department called “Integrity, Legal and Compliance.” Now, his first priority will be to work closely with the company’s lenders, who are demanding more clarity in return for the extension of almost $2 billion in financing after Wirecard breached terms on the loan. At least 15 commercial lenders, including Commerzbank AG and ABN Amro, are in negotiations about the next steps.

Wirecard said it’s in “constructive talks” with its lenders, and has hired investment bank Houlihan Lokey Inc. to come up with a financing strategy. However, a prolonged extension of Wirecard’s repayment obligation could be seen as delaying insolvency, which is illegal under German law.

In Braun’s parting note on Friday he said the “confidence of the capital market in the company I have been managing for 18 years has been deeply shaken.” He added that responsibility for all business transactions lies with the CEO.

Now Freis will need to build up that confidence to halt a share price that went into free fall -- the stock was down 36% at 10:58 a.m. in Frankfurt trading. Long-term investors have cut their stakes in Wirecard, while Deutsche Bank AG’s asset manager DWS said it will file a lawsuit against both Wirecard and Braun, a company spokesman said on Friday.

The price of credit swaps on Wirecard indicate 82% odds of default by Christmas and 96% likelihood over five years, according to ICE Data Services on Friday, while Moody’s Investors Service cut Wirecard’s credit ratings six levels, putting it one step from the lowest tier of junk.

Wirecard is also facing multiple investigations by local prosecutors and BaFin, the German financial regulator. One of Freis’ tasks will be to clarify with regulators what happened to the missing cash and what the implications will be to Wirecard’s balance sheet.

The problem has been compounded after Philippine central bank Governor Benjamin Diokno told reporters on Sunday that none of the missing money entered the Philippine financial system, after two of its major lenders denied holding funds for the German payments processor.

The company has also been forced to reassure customers that it is business as normal at its banking arm. Wirecard started offering a digital wallet called boon Planet in 2019. The app, similar to Paypal, was advertised in January this year with an attractive yield for account balances. While it is unclear how much money customers deposited at the app, the company sent out a message on Saturday reassuring its clients that their deposits are protected by a German state guarantee fund.

German politicians are now taking aim at Wirecard, once seen as proof that Germany could build a fintech giant to take on U.S. rivals.

“BaFin started its investigations early on, but sadly that couldn’t prevent the striking losses for investors,” said Florian Toncar, a German lawmaker from the opposition Free Democrats. “It would be very good to see BaFin use the tools at its disposal to quickly provide investors with clarity.”

Freis posted his job update on LinkedIn shortly after the announcement. One contact responded that it sounds like “one heck of a turn around project” but that Wirecard has found the right guy to restore credibility. In a reply, Freis quipped that the “one upside...is that I never have to worry about finding a beer when I need one at the end of the day.”

(Updates with share price in eighth paragraph, additional context.)

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