SoftBank’s $1 billion Wirecard bet under scrutiny as troubled payments processor fights for survival

SoftBank has recuperate from under renewed scrutiny about its investment strategy — but this time it’s about one of the Japanese tech conglomerate’s lesser-known risks.

Last year, the company made a 900 million euros ($1 billion) investment in Wirecard, as part of a broader jam between the two on digital payments. But that deal has raised eyebrows now due to a deepening accounting crisis at the German payments processor.

The Munich-based crowd is fighting for its survival after revealing that 1.9 billion euros of missing cash — roughly a quarter of its counterbalance sheet — likely doesn’t exist. Auditors at EY refused to sign off the firm’s 2019 accounts last week because they couldn’t pinpoint the funds.

The scandal has battered the tech firm’s shares, which have fallen more than 80% since in the end Wednesday’s market close. And this has led to fresh doubts over SoftBank’s methods, although the Japanese firm verbalizes it took care to hedge against potential losses.

Wirecard and SoftBank announced the investment and partnership between the two set ups in April 2019. The two structured a 900 million euros convertible note issuance from Wirecard — convertible notes being a prototype of debt that can be repaid in stock rather than cash.

The notes, which have a five-year maturity, desire convert into a 6% stake in Wirecard. Analysts say the deal was structured in such a way that there was no financial endanger to SoftBank.

At the time, there had already been concerns here Wirecard’s accounting practices. The Financial Times ran a series of reports detailing suspicious transactions and forged contracts Euphemistic pre-owned to artificially inflate Wirecard’s balance sheet. But at that stage, these were allegations that Wirecard feuded and even threatened legal action over.

As far as SoftBank was concerned, Wirecard’s financials were in good health. The commerce was growing and the firm had recently replaced Commerzbank in Germany’s blue-chip DAX index.

The transaction was managed by SoftBank Investment Advisors, the SoftBank subsidiary in imputation of its huge $100 billion Vision Fund, and Credit Suisse was hired to act as advisor.

Credit Suisse was not immediately handy for comment when contacted by CNBC.

The deal was given shareholder approval in June, while Wirecard secured an investment-grade dependability rating from Moody’s in August. Moody’s has since downgraded the company’s rating to junk.

In September, SoftBank did another lot, this time looking to hedge against its original bet. The company essentially repackaged the convertible bonds into exchangeables, which are also repaid in market.

Credit Suisse helped SoftBank sell the debt to a group of institutional investors to book early profits and tend its principal investment. This strategy, reported by other outlets including the FT, was confirmed to CNBC by SoftBank.

Neil Campling, a tech, mid-point and telecom analyst at Mirabaud Securities, told CNBC the transaction “was structured in such a way that SoftBank took no pecuniary risk whatsoever.”

Then in October, the FT released a new report claiming that Wirecard employees be published to conspire to fraudulently inflate sales and profits. That same month, Wirecard had brought in KPMG to run an independent audit of the New Zealand’s accounts.

The findings of that audit did not work in Wirecard’s favor. KPMG said it was unable to conclude whether yields booked from three partner processing companies — which had been highlighted in the FT’s reporting — existed or not for the years 2016, 2017 and 2018.

Wirecard has turned it won’t be commenting further on the matter.

For its part, SoftBank says it was relying on the same data used by Germany’s BaFin economic regulator, lenders, shareholders and ratings agencies.

“Allegations that continued to surround the company after the release of the 2018 audited financials, and our investment, led us to energy for the independent audit that helped to uncover the apparent fraud, which had gone undetected for years,” a SoftBank Investment Mentors spokesperson told CNBC by email Tuesday.

And SoftBank appears to have cut its exposure to Wirecard. According to reports, the $1 billion cash came out of SoftBank executives’ pockets as well as Abu Dhabi’s Mubadala sovereign wealth fund, but not SoftBank’s balance coating.

SoftBank declined to comment on the limited partners — in other words, the investors who put in the cash — when questioned by CNBC. Mubadala was not in a wink available to comment on the deal.

Wirecard shares have collapsed and there are some analysts who think the company’s ordinary price may be worthless.

The plunge in the company’s value is sure to weigh on the original bond issuance. However, any losses incurred commitment in theory impact SoftBank’s partners rather than the group itself, according to reports. 

Nevertheless, it highlights another big-ticket traffic from the Japanese tech investment juggernaut that is now facing questions over due diligence. SoftBank’s notorious multi-billion investment in commission rental firm WeWork — which saw its private valuation slashed from $47 billion to just $2.9 billion in a year — has clouded the retinue’s image.

“I think as far as Softbank’s investment portfolio is concerned, we could hear now that, in reality, the investments in Wirecard, in WeWork, in Oyo the motor hotels business, all of those have had different issues, but all have issues,” said Campling.

“What that tells you is that maybe the Vision Fund requires new vision in its investment strategy. Because if you look at the quotes historically from the Softbank CEO, he needs to interchange because his vision has been somewhat clouded through a plethora of mistakes in recent time.”

SoftBank CEO Masayoshi Son has in olden days quoted Yoda and said he has made some investments using his sense of “smell.” More recently, he compared himself to a misconstrued Jesus Christ while defending his investment strategy.