On 15 September, Grenke [GLJ.DE] saw its stock drop nearly 20%. The following day, it fell a further 59%. This was in response to the release of a report from short-selling investor company Viceroy Research, which alleged the German leasing firm was guilty of accounting fraud.
Grenke’s loss has been BlackRock Investment Management’s [BLK] gain. According to 2iQ Research, Grenke is BlackRock’s third-highest short position in Germany after industrial services provider Bilfinger [GBF.DE] and chemical company K+S Aktiengesellschaft [SDF.DE].
Prior to the Viceroy Research report, Grenke’s share price was down 38.8% for the year to 14 September, though it had climbed 27% from its 19 March low. The allegations brought against the company saw its share price fall to €23.92 on 17 September from €55 on 14 September — the lowest value the stock has traded at in more than five years, and a 74% decline on the €92.75 at which it started the year.
BlackRock’s position accounts for roughly 1.89% of Grenke’s total shares. According to calculations, this equated to €27m worth of gains for BlackRock over the two days Grenke’s share price tumbled.
The short bet paid off. BlackRock’s share price crept up 2.6% between 15 and 16 September, possibly in reaction to the successful gamble. Year to date, BlackRock’s share price is up around 10% to 16 September, and it is also up 73% from its 52-week low of $323.98, which it hit on 18 March.
BlackRock’s share price hit a 52-week intraday high of $609.69 on 2 September, right before the recent market pull-back. Its rally is pretty impressive considering the impact the global coronavirus pandemic-related economic slowdown had on asset valuations in securities markets.
BlackRock isn’t the only big firm with a short position in Grenke.
Data from 2iQ Research shows that Gladstone Capital Management and Odey Asset Management are amongst the other firms also shorting the stock. In total, around 3.3% of Grenke’s shares are being shorted, although 2iQ notes that, while this isn’t high, no short positions have been taken out since the release of the Viceroy Research report.
Grenke’s share price gained 33.56% on 17 September after executives at the company organised an investor and analyst call to respond to the allegations. Any confidence seemed to be short-lived, however, as on the 29 September the stock dropped 15.4% from its 17 September closing price of €35.66.
Grenke's share price gains on 17 September after calling for response to allegations
As of 7 October, it has recovered somewhat, regaining 13.68% to close at €40.54.
Viceroy Research’s allegations centred around a significant portion of the €1.08bn in cash and cash equivalents that Grenke announced for the 2020 half-year financial report not existing.
The report claimed Grenke’s growth was down to the “purchase of dozens of undisclosed related party franchises” in a scheme set up to “hide fake cash or siphon off millions of euros to undisclosed related parties or both”. In essence, it suggested that Grenke’s banking division was a vehicle for money laundering.
Grenke has refuted the allegations of an inflated balance sheet. However, investors are likely to be wary for a couple of reasons.
The Wirecard question
For one, Germany’s financial regulator BaFin is looking into the allegations and has said that it is also reviewing possible insider trading, according to CNBC.
Secondly, Viceroy Research is best known for alleging that Wirecard [WDI.DE] was guilty of fabricating its accounts and successfully bet against the German payment processor.
The question some commentators are asking is whether Grenke could go the same way as Wirecard.
The now-insolvent company dropped almost 62% in a single day’s trading on 18 June, after announcing that auditors couldn’t account for €1.9bn in cash. Wirecard’s share price has dropped further since then and hasn’t closed above €3 since early July, having been as high as €153.65 in September 2019.
On 18 September, Grenke went so far as to reject comparisons between itself and the now-collapsed Wirecard, Reuters reported.
“Grenke’s business model has always seemed too good to be true: exponential growth in assets, phenomenal lending margins with an exceptionally low cost of risk and apparently no competition. Modest average ticket sizes didn’t convince us that the market for this type of financing should have such an attractive growth dynamic” - Barry Norris, fund manager at Argonaut Absolute Return Fund
The jury may still be out on whether Grenke will be the next Wirecard, but Barry Norris, fund manager at Argonaut Absolute Return Fund, recently told Citywire’s Wealth Manager that things didn’t seem to add up.
Norris took a short position in the company back in 2018 following meetings with its management team.
“Grenke’s business model has always seemed too good to be true: exponential growth in assets, phenomenal lending margins with an exceptionally low cost of risk and apparently no competition. Modest average ticket sizes didn’t convince us that the market for this type of financing should have such an attractive growth dynamic,” Norris said.
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