Is SoftBank a short candidate after a new investment disaster in Wirecard?

July 01, 2020 12:30

News for shareholders in Wirecard got worse over the course of last week: Wirecard AG filed for insolvency last Thursday after revealing a 1.9 billion Euro accounting black hole.

As we pointed out in our article last Thursday, the auditor Ernst & Young couldn't confirm the existence of 1.9 billion euros in cash on its balance sheet, representing roughly a quarter of its balance sheet.

After it became clear that the trustee accounts, e.g. with Philippines' BDO Unibank Inc., didn't exist, Wirecard's management decided to open proceedings "due to impending insolvency and over-indebtedness."

As a result, Wirecard shares collapsed further, dropping below 2 Euro per share and reducing the market capitalization to less than 300 million Euro.

An interesting question arises: what does this mean for big investors in Wirecard like Softbank?

SoftBank plans to sue auditor Ernst & Young over Wirecard scandal

Last Friday German news magazine "Der Spiegel" reported that SoftBank plans to sue accounting firm Ernst & Young over its role in the scandal involving Wirecard.

When reading carefully, above we wrote: "investor", not "shareholder" when it comes to the role of Softbank in Wirecard.

The reason for that is that in 2019 a Softbank subsidiary invested 900 million euros in Wirecard, but not by buying shares, instead of through a convertible note deal. That means, that these convertible notes can be repaid in stock rather than cash, is worth a 6% stake in Wirecard once converted.

After in September concerns about Wirecard's accounting practices made rounds, it is said that Softbank did another deal with the target to hedge against its original bet, repackaging the convertible bonds from above into exchangeables, which are also repaid in stock.

To make long things short: not only will the sell out in Wirecard shares certainly negatively affect the original bond issuance.

But it also raises questions around Softbank's and its subsidiaries investment philosophy and strategy and over its due diligence.

In this context, it's certainly worth remembering the multi-billion dollar investment in WeWork which valuation was slashed from $47 billion to just $2.9 billion in a year, but also in Oyo.

While all investments have different issues, they have issues which could rather sooner than later negatively weigh on the share price of Softbank.

How to trade SoftBank Group Corp. CFD/#9984.JP in this environment?

When looking at a daily chart we can clearly see that SoftBank is technically clearly bullish and the sequence of higher highs and lows stays intact as long as we trade 4920 ¥.

Still, bulls should become a little careful with a potential bearish divergence forming in the RSI(14). We consider first signs of a top if the share drops below 5320 ¥.

A break below 4920 ¥ breaks the bullish sequence and favours further losses with a first target around 4300 ¥.

A stop should be placed at 5900 ¥, giving our idea a risk-reward ratio of a minimum of 580 ¥ to 1020 ¥ or 1 to 1.75:

Source: Admiral Markets MT5 with MT5-SE Add-on #9984.JP chart (between February 5, 2019, to June 26, 2020). Accessed: June 26, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015 the value of #9984.JP dropped by 15.4%, in 2016 it increased by 33.1%, in 2017 it increased by 20.5%, in 2018, it dropped by 18.7%, in 2019 it increased by 33.5%, meaning that after five years, it was up by 30.9%.

Discover the world's #1 multi-asset platform

Admiral Markets offers professional traders the ability to trade with a custom, upgraded version of MetaTrader 5, allowing you to experience trading at a significantly higher, more rewarding level. Experience benefits such as the addition of the Market Heat Map, so you can compare various currency pairs to see which ones might be lucrative investments, access real-time trading data, and so much more. Click the banner below to start your FREE download of MT5 Supreme Edition!

Disclaimer: The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:

  1. This is a marketing communication. The analysis is published for informative purposes only and are in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
  2. Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
  3. Each of the Analysis is prepared by an independent analyst (Jens Klatt, Professional Trader and Analyst, hereinafter "Author") based on the Author's personal estimations.
  4. To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
  5. Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures refer that refer to any past performance is not a reliable indicator of future results.
  6. The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
  7. Any kind of previous or modeled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
  8. The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.

Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, you should make sure that you understand all the risks.

Admirals An all-in-one solution for spending, investing, and managing your money

More than a broker, Admirals is a financial hub, offering a wide range of financial products and services. We make it possible to approach personal finance through an all-in-one solution for investing, spending, and managing money.