Grenke Leasing Short Attack – First analysis

Background:

Long time readers of my blog know that I covered Grenke a while back and unfortunately invested instead in what I thought was the “Australian Grenke” with a pretty bad outcome.

Now Viceroy Research came out with a blazing short attack on Grenke. Viceroy seems to be the same guy that released the now famous “Zatarra Report” on Wirecard in 2016.

This post is a first attempt to look at the allegations in order to find out if they are true and how severe they potentially could be. At the time of writing, Grenke is down more ~ -20% and close to the lows from March.

1. Non disclosed related party transactions

This looks indeed strange. The allegation is that Grenke is buying “franchisees” in foreign jurisdictions from companies that are ultimately controlled by Mr. Grenke himself. If this is the case, then this would be a pretty serious issue despite the fact that the total volume is “only” 100 mn EUR.

In general I think it is also questionable not to consolidate these entities from day one if the sole purpose of these structures is to acquire the company at some point in time. Not sure how this works under IFRS, but this clearly opens up some very creative P&L “opportunities” to put it mildly. Every newly established subsidiary will not be profitable from day one. Instead of showing these losses in the consolidated P&L of Grenke Group, this mechanism allows a “recycling” of losses outside the P&L into Goodwill which is nice but maybe not in the spirit of generally accepted accounting rules.

There is an interesting (German) Video where Grenke among other things explains the “Franchise system” (Minutes 32:00, 36:00):

To me it is pretty clear that the Franchises should be treated as Group companies, independent from the question if Mr. Grenke himself benefits from the sale or not. He even mentiones that the Gorup has “2000 employees including the franchises”.

So it will be very interesting to see how Grenke’s answer will be to those allegations and if they will start consolidating the entities.

2. Grenke Bank support of fraudulent trading operations

Grenke Bank has been processing payments for fraudulent trading operations well after the BAFIN warned against doing so. This could be sloppiness but overall does not shine a very bright light on Grenke Bank controls.

3. Grenkes underlying assets are “dying”

A large percentage of Grenkes assets are items like  software licenses, Printers, copy machines etc. which the authors think are “dying assets”. This is clearly a judgement call, however the stated numbers (8k avg price per printer) look indeed strange and the percentage of photocopier assets is indeed high.

4. Low default rates

Claim: 3% default rates are too low, should be  more like 10% that are normal for US subprime auto loans.

The default rates are indeed surprisingly low, but the “proof” is weak in my opinion. Bancruptcy laws are very different across countries and making a comparison to US auto loans is a little bit to easy from the authors.

5. Dependence on resellers

85% of Grenke’s business volume is done via resellers, only 15% direct.

Indeed, indirect financing via resellers can become a big issue. My “Australian Grenke” Silver Chef actually got killed by fraudulent resellers. Grenke has been operating more and more in jurisdictions where fraud in general is a bigger issue (Turkey, Brazil) so the risks are clearly increasing.

The report also mentions the specific structure: A Customer has 2 seperate contracts with reseller and Grenke. I am not sure if this is standard or if only Grenke is doing this, but it clearly benefits fraudsters at the expense of customers when something goes wrong.

6. Financing of Ponzi schemes

Claim: Rhino, Viewble and Rebl are schemes where small businesses were sold subscriptions to a TV set that should generate advertisement revenue. However the revenue never came and the hugely expensive Grenke leasing loans (20x the price of the TV set) remained. A similar scheme was operated with charities and schools in UK.

As mentioned above, the dependence on resellers makes fraud clearly more easy. It is mentioned that Grenke was not the only lender in these cases but the fact that they subsequently collaborated with the successor of one busted scheme doesn’t look good. The UK can be quite problematic if they zoom into predatory lending, a fact that UK Banks and subprime lender Provident Financial can clearly testify on.

7. Cash flow statement

Here, the report claims that issuing of Hybrid debt despite having cash is a warning signal.

In my opinion, this is a pretty weak argument as a hybrid is issued to support the capital ratio and not because of cash requirements. This is rather sloppy research from the Shorty.

However, the “Free Cash Flow” reporting of Grenke is clearly misleading as I already mentioned in a post in 2016. This is what I wrote back then:

In Grenke’s case we can read from the balance sheet, that financial liabilities have increased overall by around 400 mn EUR, however financing cashflow is only +13 mn. How can that be ?

The solution is found in the Operating cashflow part: Grenke actually reports the increase in borrowing as operating cash flow. Just out of interest I checked different leasing companies such as Sixt Leasing, Aercap and a few others and Grenke is the only one doing so.

What are the implications of this ?

The implidation of this is very easy: Grenke’s reported cashflows are absolutely meaningless. If you include borrowing into operating cashflow, you can create any free cash flow number you like just by borrowing some more money. This is not the meaning of Free Cash flow.

The fact that they report as such is not a crime, but it clearly means that they show at least some “creativity” when it comes to financial reporting.

As I mentioned back then, a growing asset heavy leasing company always has negative free cash flow, so I never understood how some investors took these numbers seriously,

8. CFO

The report mentions that they have no dedicated CFO and that the “acting CFO” is not registered as public accountant. I don’t think that such a rgeistration is required in Germany, at least I have never heard about it. It is indeed somehow starnge that they don’t have a formal CFO role.

9. High amount of short term refinancing

The report claims that the high amount of annual refinancing is a proof that the business is not profitable. To be honest, I didn’t understand the resoning:

This effectively means Grenke is not making any money from the receivables in its asset book, as the tail end of lease income is assigned to its creditors.

There is clearly operational risk from short term refinancing and I think that is why Grenke has increased cash at HY 2020 so much, but it doesn’t lead to the conclusion of the shortie.

Summary:

Many of the allegations in my opinion are rather superficial or sloppy, such as mixing up capital requirements and cash requirements.

However the related party / consolidation issue is really critical. If this is true, this alone would make the company uninvestable for me and/or require a much higher discount rate for future profits than the market currently assumes.

To be honest, I don’t find Grenke super transparent anyway, that’s why I never invested in them despite their stellar growth. And yes, the valuation was always an issue, especially branching out into high risk jurisdictions.

On the other hand, the shorties chose a vulnerable target: Everyone knows that Grenke will suffer defaults and their business model relies on the ability to refinance. So false allegations could really hurt the company. From what I have heard, there was unusual activity in short dated, out of the money put options last week. So Viceroy doesn’t only do this because they are Mother Theresa. On top of that, BAFIN will think twice on acting against the short seller, especially with the Wirecard story still unfolding. This “attack” oin Grenke was well thought out and well timed.

However, especially financial businesses need to be run in a way that they can withstand such attacks when they are not true. You can’t just blame the shorties if things go south.

So let’s see how this turns out. Current score: Viceroy: 2 , German Financial growth companies: 0

 

 

 

43 comments

  • Grenke is not a ficitional business, but a rip-off. What is not disclosed in the annual report is the fee model Grenke uses which most people will find strange. First and foremost – Grenke is not a leasing company, it is a renting company. In operating lease contract, the lessee would pay for the use over time (not exactly the life time of the asset) while when “leasing” from Grenke, the lessee completely pays the asset off (Grenke fully amortizes at the cost of the lessee be it a lenovo rented over 12 or over 24 months). I still don’t understand how and where this company is adding value. Here is how the contract works:
    You enter a shop on April 15 and say you are interested in a lenovo with a price tag of 2400 GBP. The retailer comes back and says: here is financing from Grenke: 24 Months lease period for a leasing fee of 130 GBP a month. You think, ok, why not and then comes the contract:
    – 75 GBP administration fee
    – The 24 month “leasing” period starts at the beginning of the next quarter – in this case 1. July. From April 15 to June 30 you pay 2,5 x lease fee (they call it something like a “usage fee”). So, you will have paid 26,5 installments instead of the 24…
    – Then: insurance, they will offer you “their own” insurance for something like 50 – 60 GBP a year. I heard they insure their assets for something like GBP 10 for every 1000 GBP in value. So, over the 26,5 Months you pay somehting like 140 GBP for insurance while Grenke pays 20 GBP – the spread is their revenue. Of course, you can insure yourself, but if you don’t, they take the spread.
    – Come the “end” of the contract you and don’t cancel the contract itself, Grenke will tell you well, you haven’t cancelled, the contract is prolonged for another three months…please send us three more months of leasing fees. In the end, you will have paid a total of 2,5 + 24 + 3 = 29,5 monthly installments while the 24 were enough to completely amortize the asset and for Grenke to earn on the interest spread.
    – Not done yet: once you finaly cancel the contract Grenke will tell you that the asset is not yours, that you have only rented it and that you can purchase it from reseller (you can’t from them since that would be a financial lease and would put them under reguatory obligations). The price however is set by Grenke and they will tell you that the asset is worth another 500 GBP so if you want to purchase it, plase send the money.
    – If in the end you think it was enough and you just want to leave without purchaesing the asset from them, they will put it on their online asset broker website where returned assets are resold. asset-broker.de

    Go and get a Grenke contract yourself to find out this is true.

    https://www.srf.ch/sendungen/kassensturz-espresso/themen/konsum/leasing-falle-wucherzins-im-kleingedruckten

  • Who owned CTP before 2020? Why did WG buy it? Why did they not want CTP to have control in 2014 and why did a ‘confidant’ of WG become the swing shareholder? In the past, for which franchises exactly did Grenke AG not exercise their call option?

    Maybe there are good answers for these questions but until given, doubts remain. Also, no one serious is questioning the commercial logic of the franchise system, just the setup involving related parties, so the defensiveness is also a bit disturbing…

    Oh and why say you only ‘arithmetically’ own 8% when your wife and children own 32% too?

    • I thought the swing shareholder is on the level of the franchise enterprises. Why should CTP wanted to avoid to have 50%, who was holding the rest of the shares? Did they allow the founding franchise manager to have around 40%?

      a CTP GmbH does not exist – I guess they mean the mentioned Beteiligungs GmbH.

      and there is a CTP Holding GmbH, where WG was shareholder since april 2018…. what was their role?

  • Rob Vinall with a more general update on his approach to short attacks:

    https://www.rvcapital.ch/post/on-short-attacks

  • For the record: I started to buy some bonds at around 63% of notional. So far ~2% position only.

    Reason: I don’t believe in larger scale fraud. Maybe some embarrassing details but not Wirecard. The stock however is too hard to value at the moment.

  • GNP-GlobalNosePicking

    Seems many directors of Grenke have been buying in the company recently. Three options: either they are idiots, or have been fooled by W.Grenke, or the ShortSeller is wrong…

    https://www.finanzen.net/insidertrades/grenke

  • Prof. Meintner from Valuesque (who knows a lot more about accounting than I do) with a must read:

    https://valuesque.com/2020/09/16/viceroys-grenke-cash-accusations-rather-unlikely-that-they-are-true/

    • Very measured comments by Valuesque on the consolidation issue. Even if Grenke has been proactively avoiding consolidating, that of itself is not a sign of rampant fraud. That said, finance companies are black boxes and as Buffett himself says it is especially with banks you need to be 100% sure of management integrity. Putting aside the formal accounts, their investor presentations also do not provide a more representative view. For example, on page 6 of their 11 February 2020 FY 2019 presentation, they show new business volumes for ‘Grenke Group’, which they don’t define on this slide but in the MD&A of their annual report they clarify as being the Grenke consolidated group plus the franchises. However, on the same slide they are stating net profit of 142.1m, which is the consolidated figure that does not include franchise earnings (presumably losses). So they are picking the better number to report for sales and profit.

      As an aside, I do not think the losses are as bad as Viceroy purports in the two tables on page 13. The second table shows profitability by country since franchise acquisition, per the annual report notes. Had Viceroy included all the countries from that note and not just those where they bought out franchisees, we would have seen that Grenke’s most profitable country is…. Ireland. This maybe a mystery to Mr Perry if he is not familiar with basic tax structuring, where licence fees, interest and other various charges are pushed down to country subsidiaries in order to shift profits out of higher tax countries to lower tax countries like Ireland. I suspect he does understand it but prefers to just ramp up the fear factor. There are also misleading errors here too, for example in table 1 the 2nd biggest acquisition was the Croatian franchise and the table shows it has having minuscule interest revenue but neglects to mention that this franchise accounts for leases as operating leases and not finance contracts (see note 6.1.2 of 2018 consolidated accounts).

      A further peculiarity is Perring’s Figure 3 on page 6 which purports to show Wolfgang Grenke as ‘owner’ of CTP. If you follow the link in footnote 3, the table on the actual website is different and lists him as ‘private person’ and not owner. Of course, we still do not know who is behind Sacoma, CTP’s shareholder, but Viceroy appear to have brazenly doctored source documents before including them in their report.

      • Very good thougts Jerry!! Thank you. I had look at the extract from the commercial register. W. Grenke bougt Sacoma in 2020. If there was no connection between Grenke and CTP, this would mean theres even no undisclosed related party transaction in 2019. To me the whole report seems very constructed. there are some similarities with Wirecard, but this is exactly what Viceroy was looking. In some point it seems to me, that Viceroy does not understand Leasing. I Think Grenkes impairment on receivables is on average about 2%. Industry Default rate in Europe on Leasing contracts 2007 – 2011 about 1,9% on average. This includes 2008! I dont think that Grenkes numbers are unlikely.

  • Jupiter European Opps of Darwall was also in Grenke.
    He is a collector of dubious businesses!

  • On a more detailed read following my earlier comment below, there are many flaws in this report and on the whole it is not credible. However, like memyselfandi, I can’t get past the failure to consolidate the franchisees, and as a result their start-up losses. Grenke’s valuation has been very full, because of its growth and also the consistency of its profitability. At the very least, there may be investor lawsuits as a result. And if there was intent to embellish results, then the company is uninvestable.

    Per my understanding of IFRS, Grenke’s call option to buy franchisees at a pre-determined formula is reason enough to consolidate. There is then the fact that Wolfgang Grenke is a director of what appears to be the franchises’ holding company and majority shareholder, CTP. But also from my understanding, Grenke controls franchisees’ credit decisions and makes them whole for any credit losses. The latter point was itself the determining criteria for consolidating 3 of Grenke’s SPVs used in its ABCP programme, per the 2nd paragraph 2 of Note 3.17.2 to the 2019 consolidated accounts. (I might add that if you read that paragraph carefully, the company appears to be saying that OTBE, consolidation is a disadvantage).

  • Have you seen the -kind of- reply from Wolfgang Grenke in the Spiegel-article?

    He offers a -imho rather lame- explanation that CTP actually is not a related party because first he wasn’t the economic owner while CEO and later that he is no controlling shareholder of Grenke because he only holds 20% of the family holding.

    What do you think about it?

  • Viceroy says that the bonds are guaranteed by the Grenke Bank.
    That is not true imho. I checked the bond prospectus and can not find anything like that.
    The guarantee is by the GRENKE AG. not the bank.

    • Another inconsistency in the report. The report is really sloppy, but that part is not relevant in my opinion.

    • I could not find this either. Nonetheless, Grenke’s funding is about 20% from deposits so it would be a problem if they lost their licence. However, report bases it’s assertion that this will happen on 1 incidence of a fraudulent bank account with 700k balance on 1 billion total deposits. Maybe cockroach in the kitchen or maybe not.

      • I don’t think that they will lose their bank license on short notice. ANother point: I am not sure how exactly they can use the deposits to fund the leasing part.

        Grenke Group cannot just take out a big loan from the bank, that doesn’t work. It would be interesting to understand how exactly they access the cash funded by deposits.

  • Grenke issued a first statement yesterday:

    Click to access af34606d0a2d4b23b41112fffd20c055.pdf

    In my opinion, the claim of the shortie that the 1 bn cash is “fake” was BS anyway, so I didn’t even bother writing about. But the real issue at least for me is the consolidation/related party topic.

    I hope they are transparent and clarify this quickly.

  • RobV (in Grenke & CreditAcceptance) will get hurt….

  • I am one of a group of over 1000 businesses defrauded by Viewble and Rebl media in Australia. After 2 years fighting, we have just had our so called contracts, declared null and void. Only those of us financed through Flexi group and Multipli, have been released, as they were members of our financial regulator. Grenke were not. They are still chasing people.

  • Yes, very good summary. But one point you and viceroy didn‘t understand (your point no. 3): „This is clearly a judgement call, however the stated numbers (8k avg price per printer) look indeed strange“
    This is not strange. This figure is on a contract base, not an asset base. The screenshot in the viceroy report says clearly „no. of contracts“ not number of printers. So in most cases why should a company only lease one single printer?
    So if a Office copier/printer costs 3.000 Eur and a company rents 10 copier within one contract, the contract value is 30.000 Eur

    • Good point !!! Would be easy to fix if Grenke would provide numbers per machine.

    • For me personally, the printer/copier issue is still a major red flag until further clarification. Obviously, you could have several assets in one lease contract even though there are industry insiders trying to change this.

      The issue that I have with printer/copier leasing is that Grenke’s volume is supposedly so substantial, that they would finance more than 10% of new printers in their core European markets. Dividing the roughly 180m Euro by 3,000 (printer cost of say 2500 and 500 in future discounted interest), that gives you a number of 60,000 printers that Grenke has leased out during H1 2020. Taking in consideration that Italy, France and DACH are the most important markets: How can you lease so many printers in times of a complete economic standstill and lockdown?

      In Europe, about 10-20% of assets are leased. If we assume that Grenke has a 100% market share in copy machine/printer leasing, this would lead to the assumption of 300,000 to 600,000 sold printers/copy machines in H1 2020. Possible, but likely?

  • Lots of small business owners have been hugely affected by this in Northern Ireland and at present are trying to prove a case of mis selling. We have reported the issues to all governing bodies we can think of.

  • I came to pretty much the same conclusions as you on a first quick read. Few points that are hopefully additive:

    – my understanding of the ‘hiding fake money through franchise takeovers’ is Viceroy is not saying Grenke is doing this to siphon off cash to insiders but rather to mask the profitability of its core business. They seem to be saying Grenke’s cash balance is overstated as it includes fake profits from the core business, as loan losses are underreported. So when a franchisee is bought, this is an opportunity to launder the fake cash by inflating the price and turning cash into goodwill. However, Grenke only has 100m of goodwill which does not amount to a lot of overstatement spread out over the years, It is indeed dodgy if related party transactions are not being reported properly, but there does not seem to be a motive here

    – the whole premise of Viceroy saying loan losses are understated appears to be that Grenke replaces non-performing loans with performing ones in the ABS vehicles. But this is a fairly common credit enhancement tool along with overcollaterisation in order to maintain the ABS’ credit rating, not a sign of fraud. Viceroy does not appear to offer any other evidence of higher loan loss rates, except anecdotal

    – It cites only a couple of cases of reseller fraud and leaps to the conclusion that Grenke was complicit, again offering no real proof. Many other finance companies have been used by dishonest resellers in this manner https://www.bbc.co.uk/news/business-15579974. Viceroy then says “Viceroy has connected with dozens of consumer advocacy and business communities internationally, from the UK & France to Australia & Brazil, which have been victims to frauds perpetrated by – or enabled by – Grenke” but it doesn’t provide details and appears to be exaggerating based on a couple of reported cases (schools one is from 2012).

    – ‘Spy the Lie’. The report uses devices to persuade us, for eg the comparison with Lernout & Hauspie and Steinhoff to draw into question the franchise takeovers but as per above not providing convincing evidence that Grenke is using the franchise system for this purpose as opposed to its stated purpose of de-risking new country entry.

  • Did you understand the “hide fake money through franchise takeovers” part?

    To me this looks like two serious issues: hidden related party transactions, which could mean grenke has not been honest and put money away (or has something else to hide there) and this clearly looks bad.
    The other thing is compliance, they will have to explain how exactly they ensure to only work with honest partners, and why so many frauds could happen – maybe the incentive structure (variable salary components) let the local people turn a blind eye on such issues? At least the report claims that they could have stopped this earlier, and this sounds very realistic.

  • Very good analysis of the current situation.

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