From the desk of Jeroen Bakker
Benelux Consulting Lead, Pierpoint Financial Consultin
After the four-part series on securities lending trading strategies, I will now focus on famous and maybe sometimes not so famous securities lending transactions both past and present. These transactions have probably been in the news, have had a significant impact on the financial markets and have most likely generated a substantial part of securities lending revenue for beneficial owners.
The first in the ‘Transactions Series’ is Wirecard – the German digital financial commerce platform listed on the German stock exchange and member of the DAX30. Wirecard has been on the front pages of the news in the last few weeks but most observers have been aware of allegations that something was not right for several years. Journalists and analysts have had to fight the company, the regulator, law firms and the general opinion, but the truth prevailed.
With data on stock price sourced from Business Insider and securities lending activity provided courtesy of FIS’ Astec Analytics I will provide an overview of Wirecard’s history, but my primary focus is to review what happened in the securities lending market from IPO to insolvency filing and everything in between. There is of course much more information surrounding this story, including both corporate and regulatory attacks on those ringing alarm bells, however, we have only selectively included portions in this piece.
To safeguard the securities lending fee data, I have grouped the fees into “brackets”, rounding up the levels.
Early years
Wirecard obtained its stock market listing through a reverse IPO of InfoGenie, thereby avoiding the long due diligence process involved around an IPO. In 2006 Wirecard was included in the TecDAX, which is the stock index with the 30 largest German technology firms.
Those early years were primarily marked by international expansion including several acquisitions using funding raised through a €500mn shareholder capital raise between 2011 and 2014. From a launch price below €7 the stock price rose to a price circa €40 at the end of 2016 from which a meteoric rise commenced.
In 2015 the FT published its first articles on FT Alphaville called the “house of wirecard” series suggesting a €250mn hole in the balance sheet. Different research reports started appearing with a negative outlook on Wirecard. The company and the German regulator responded with allegations that these reports were paid for by short sellers and started investigations into the various sources.
In 2016 the first allegations were published about potential money laundering under the pseudonym Zatarra with both Wirecard and BaFin, the German financial regulator launching investigations into Zatarra.
In 2017 Wirecard acquired Citibank’s prepaid card services business thereby entering the North American market.
From a stock loan perspective, the years 2015-2017 show the following utilisation and average fee levels:
From a starting utilisation of under 9% in2015 a rapid increase in utilisation is noted throughout the year closing out at 70%. Despite the utilisation levels, fee levels remain at general collateral (GC) levels. The following year saw GC levels and high utilisation throughout, with the exception of March- July period. This fee spike of up to 25% can be attributed to the 15/6/2016 dividend. A similar small fee increase can be seen from the start of 2017 however that again seems to indicate a series of trades over record data (19/6/2017) with a longer duration (6 months). By the end of 2017 fee levels returned to GC again, with utilisation falling to below 20% from Q2 onwards.
2018
Wirecard’s internal legal department investigated the finance team of the Singapore office after whistle-blower allegations about fraudulent wire transfers. Investors remained bullish with the company’s share price rising to its all-time high of €192.20 in September. In the same month Wirecard replaced Commerzbank in the DAX30, automatically making it an investment for passive investors including pension funds and index trackers, who with hindsight acquired Wirecard at its peak price.
2018 was an uneventful year securities lending-wise, fees remained stable below the 50-bps mark and utilisation below 2% during August and September. This of course matches the share price rises that Wirecard experienced during the year, leading to losses and close-outs for short sellers. Keeping a short on the books with a rising share price can be a risky exercise, as this leads to increased collateral margin calls as prices rise. Not all short sellers have sufficient risk appetite and capital to carry the positions in the face of such price rises, while some choose to take their losses waiting for a better re-entry point.
2019
In February 2019 there was a raid on the Singapore offices by the police. BaFin announced a two-month short-selling ban while the stock price fell below €100. In April Softbank injected €900mn in Wirecard, causing the stock price to return to the early 2019 range. In September Wirecard issued €500mn in convertible bonds, rated investment grade by rating agency Moody’s. At the end of the year things started to heat up between Wirecard and their intelligence officers on one side and mostly the FT alongside Crispin Odey and Argonaut Capital’s Barry Norris famously profiting from Wirecard short positions on the other side. From 2018, Zatarra had re-emerged as Viceroy Research and continued its challenges on the company, carrying its own short positions.
In the securities lending world, we can observe the seasonal influence of the 17/6/2019 dividend with both fees and utilisation increasing in the months February till June, but by the time that the fee levels returned to GC in July the stock price had recovered from a February low of €86 to €150. The increased availability, lower fee levels and higher stock price, combined to create an opportunity for shorts to pile back in, driving utilisation close to 80%. Fee levels rose to near the 1% fee bracket reflecting rising short interest.
2020
The publication of a special KPMG audit was postponed as were the full year audited results from EY, both pushed back to the end of April. The KPMG report was published on April 28 in the midst of the Covid-19 crisis. The report stated that the accounting firm could not justify the majority of the 2016-2018 Wirecard profits as well as raising questions on €1bn of cash balances.
In early June the German police raided the Wirecard offices in Munich; while on June the 18th Wirecard announced the €1.9bn as “missing”, followed four days later with the admittance that the cash probably did not exist due to multiyear accounting fraud. On June 25th, the company announced it would file for insolvency.
The extremely high utilisation levels from the end of 2019 finished off remained high in 2020. In general utilisation levels above 50% indicate significant short interest in certain stocks. In the case of Wirecard levels rose even further to north of 75% and by the end of June were close to 100%, The blood in the water that started with a small cut in October 2019 had turned into a shark frenzy in June 2020 worthy of another sequel in the Sharknado series (which ironically had its initial release in Germany).
To further elaborate on this – I have highlighted the months April, May and June 2020 and indexed the SBL fees, so the below graph shows the SBL Fee delta compared to the prior day.
Below are the utilisation levels for the last two years, highlighting the main spike in October 2019, where in three days the utilisation more than doubled from 35% to 74%.
Conclusion
Normally we end our blogs with a conclusion on how securities lending transactions are incorporated in daily investment management life. This time, I would like to provide you with a trading example what could have (and most likely has happened) with the Wirecard short.
Take the “hypothetical” case whereby an investor shorted 50.000 Wirecard at the start of October 2018.
The average fee for the period 1/10/2018 – 1/7/2020 was 2.7% however in order to calculate the daily cost to borrow properly, you need to multiply the stock price times the daily rate and divide that by 365. If you add the daily costs from 1/10/2018 till 1/7/2020 you come to a borrow cost of €128,585.
· Selling 50,000 shares at €192.20 generates €9,610,083.75 · Buying back 50,000 shares at €4.80 on 1/7/2020 costs €240.000,00 · Net profit €9,610,083.75 -/- €240.000,00 -/- €128.585 = €9.241.498,75
There are the additional collateral costs which could be estimated at 50bps per annum for posting Euro cash collateral which equates to a further €75,000 cost for the duration of the transaction.
For this example, I used the close of 1/7/2020. In the meantime, the stock price has dropped further to €2.42 and the company has filed for insolvency.
End of the story??? Not quite – short sellers normally do not close out a short when a company defaults; they will keep the short on the book because even a high fee multiplied by a low stock price gives a low cost of carry. Currently, the daily run rate for 50,000 at an 80% fee is €270.00. There is still an opportunity for further profits as the insolvency plays out.
Stay tuned for more from us on the Wirecard story.