Supply chain finance disruptor Greensill is undone by its own financial alchemy, putting at risk thousands of jobs in the UK, Australia and the EU. The timing could not be worse for already buckling supply chains.
On Monday, the supply chain finance firm Greensill Capital filed for insolvency after defaulting on a $140 million loan it owes to Credit Suisse. Its parent company in Australia had already filed for insolvency there. According to UK court documents, Greensill had “fallen into severe financial distress” and can no longer pay off its debts. Over the past week many of the company’s directors have been frantically jumping ship, including its chairman Maurice Thompson, Australia’s former foreign minister Julie Bishop and former Morgan Stanley executive David Brierwood.
The firm has been in trouble for some time, as I warned in a previous NC post. A number of its client companies already collapsed in 2020. In the aftermath attention switched to the financial menage á trois Greensill had formed with its primary backer, Soft Bank, and Swiss mega-lender Credit Suisse. Greensill was also under investigation by German banking regulator BaFin and the Association of German Banks, an industry group, over its German subsidiary Greensill Bank’s huge exposure to a single client: U.K.-based steel magnate Sanjeev Gupta.
Greensill’s fall from grace was as spectacular as its meteoric rise, writes the FT‘s John Plender:
Greensill Capital went from nothing in 2011, when Lex Greensill abandoned a big-bank career, doing global supply chain financing at Morgan Stanley and Citibank, to go it alone. By 2019 this upstart non-bank says it had extended $US143 billion ($185.5 billion) of financing to 10m-plus customers and suppliers in 175 countries. Its founder also notched up powerful contacts in government and hired former UK prime minister David Cameron as an adviser.
Big money began flowing in from big players. In 2018, private equity group General Atlantic injected $250 million of fresh capital, valuing Greensill at $1.64 billion. In 2019, the SoftBank Vision Fund put in $1.5 billion more. That gave the company a paper value of around $6 billion. That has almost completely evaporated. Apollo Global Management is reportedly in talks to pick up the rump of Greensill’s juiciest assets for as little as $100 million.
How did things turn so sour so quickly?
1. Financialization gone awry. Greensill’s main line of business was reverse factoring, a controversial financing tool that has been around for decades but whose use has exploded in recent years. Here’s how it works; a large company hires a financial intermediary, such as a bank or a fintech firm like Greensill, to pay a supplier promptly in return for a discount on their invoices. As a result, rather than getting paid in 30, 60 or 90 days – or later, as is often the case when small businesses deal with big ones – the supplier gets paid earlier, but less. The buyer pays the money it owes the supplier to the bank, many months later. The bank pockets the amount it doesn’t pay to the supplier in return for its services.
For large companies the advantages are twofold: they get to preserve cash on-hand by extending payment terms with vendors. They can also record the amount they owe to the supply chain finance firm or bank as accounts payable on the balance sheet rather than as debt. This makes their liquidity position appear healthier than it actually is. And that can be dangerous. Companies can conceal the true size of their debt for longer, leaving investors and creditors bearing bigger losses when they finally collapse, as happened with Spanish green energy giant Abengoa in 2015, UK outsourcing giant Carillion in 2018 and NMC Health, the former FTSE 100 private hospital company, in 2020.
Greensill added an extra twist to the tail. Rather than wait for the payment to arrive from the buyer, it began bundling up invoices into securities and sold them to asset managers, insurers, pension funds. One of the biggest buyers was Credit Suisse. To make these risky bonds more appealing to investors, Greensill purchased credit insurance on them. This lethal combination — rampant securitization and the flimsy protection provided by credit insurance, which can be yanked away at any moment — led to its eventual undoing.
2. Without the insurance, the debt is toast. By 2019, Greensill was boasting that it had become one of the largest non-bank bond issuers in Europe, working with over 100 global institutional investors. But all of those securitized bonds depended on the credit insurance underpinning them. In July 2020, a little-known Australian insurer called Bond and Credit Company (BCC) pulled the rug from under Greensill by refusing to renew insurance policies covering $4.6 billion in corporate loans backed by the financier’s firm.
The policies were scheduled to lapse on March 1, which is precisely what happened. On that day, two of Greensill’s biggest backers, Credit Suisse and Swiss asset management firm GAM, discovered there was no credit insurance underpinning many of Greensill’s payables-backed sercurities. Both immediately pulled the plug on their supply chain finance funds. Unlike the subprime mortgage lenders in 2008, Greensill continued to have skin in the game due to its exposure to first losses under an uninsured part of the fund. On top of that, it had “been informed by a number of clients” that the loss of insurance “would most likely cause them to become insolvent”, reports the FT.
3. Greensill’s concentrated exposure to a small handful of companies. BaFin’s investigation of Greensill’s German subsidiary, Greensill Bank, revealed that most of its lending had been going to the suppliers of just one client: Anglo-Indian steel magnate Sanjeev Gupta. In total, Greensill has lent Gupta’s GFG Alliance more than €3 billion of funds. That money helped fuel GFG’s recent acquisition spree of unwanted industrial assets. BaFin responded last week by imposing a moratorium on the small-time lender. It also filed a criminal complaint against the bank’s management for suspected balance sheet manipulation.
Gupta is not just Greensill’s biggest client; he was also a former shareholder. That is, to put it mildly, highly irregular. But Greensill has plenty of form when it comes to fishy behavior. For example, in 2016 and 2017 its liabilities exceeded its assets, according to a report by Scope rating agency. Yet it was still invited to participe in the UK’s Coronavirus Large Business Interruption Loan Scheme (CLBILS). This allowed it to extend even more loans, this time government backed, to Gupta’s empire. The UK government withdrew its backing of the loans last week.
Gupta is not the only Greensill shareholder that has received loans from Greensill. In 2019, Greensill drew upon its Credit Suisse investment funds to lend $350 million to General Atlantic, its second largest investor. And when Greensill was appointed as the exclusive broker of the assets of Credit Suisse’s $10 billion supply chain business, many of those assets, as luck would have it, ended up financing companies funded by Greensill’s biggest investor, SoftBank’s Vision Fund.
This sort of behavior eventually attracts attention, even from semi-dormant financial regulators like BaFin. The Big Four accountancy firms refused to audit Greensill’s books as it mulled a stock market listing last year. The writing was already on the wall, it seems. The question now is how far and wide the damage could spread.
The answer: pretty wide and pretty far.
Some of Greensill Bank’s depositors could lose some or all of their deposits since only the deposits of private investors and foundations are insured by the deposit protection fund of the Association of German Banks. Thousands of jobs could be lost as companies that had grown to depend on Greensill’s funding to pay their suppliers suddenly lose that funding and are unable to pay their suppliers. This could set off a domino effect along supply chains.
Greensill itself warned that some of its clients could become insolvent, putting at risk as many as 50,000 jobs globally. Gupta’s GFG Alliance alone employs 35,000 people in 30 countries, many of them in the steel industry. According to Greensill’s insolvency filing, GFG would also collapse into insolvency if Greensill Capital “ceased to provide working capital finance to GFG.” GFG naturally denies this. It is frantically trying to raise emergency funds from Glencore by forward selling aluminium to the metals behemoth.
Nobody yet knows who will end up holding the bag. The candidates include governments that provided guarantees on some of the debt GFG issued to buy up struggling domestic companies. The insurance industry is also exposed, in particular two firms: Insurance Australia Group Limited and Tokio Marine Holdings. The latter is probably big enough to absorb a heavy blow, the former less so. It already had to raise fresh capital in November. Credit Suisse and GAM, whose share price never recovered from its last Greensill-related scandal, are also at risk.
But the biggest danger of all, says Erik Hofmann, a professor at the Institute of Supply Chain Management of the University of St. Gallen in Switzerland, is that Greensill’s downfall could set off a ripple effect across the $1.3 trillion global supply chain finance market, which is already grappling with reputational issues and the fallout of the coronavirus pandemic. The Greensill case could, he adds, trigger “a fatal loss of confidence” in supply chain finance, potentially starting a “domino effect” of investors pulling funding. Let’s hope he’s wrong.
Why did BCC sit down while the music was still playing? Presumably they were never going to be able to pay all the claims anyway. Otherwise the credit insurance would have been priced to high to be useful in this scheme. Sorry if I sound too cynical but reading about finance tends to cause it.
That is one of the big as yet unanswered questions, Robert. Rumours are circulating about a rogue underwriter, which bears echoes of the classic rogue trader story that tends to be wheeled out whenever a bank suddenly “discovers” a gaping hole on its balance sheet. It’s also possible that BCC got spooked by the number of bankruptcies of Greensill customers last year, which will have had an impact on Greensill’s balance sheet. For the moment all we seem to have are rumours and speculation. The comments section of this FT article has some pretty good coverage but it’s behind a paywall.
you link back to NC not to the FT :)
Hi Nick, you’re right on all the key points but the insurance issue is a little more nuanced….
A lot of people don’t get the ‘insurance-as-unconditional-guarantee’ thing. This was non-payment insurance – not typical trade credit insurance BCC were providing. Cover was provided on Irrevocable Payment Undertakings – a convoluted construct that depending on how invoices were financed could be either treated as bank debt or trade debt. And as insurers hate financial guarantee ( see the municipal bond insurers of the 2000’s ruinous wrapping of RMBS and CMBS) you can see where the legal arguments are heading – ‘where is the indemnifiable asset?’ and ‘we don’t provide financial guarantees…’ Most importantly, the insurance was a type of guarantee that critically allowed RWA exposure amounts to be reduced at Greensill Bank by about 80% – so the guarantee shouldn’t have been able to be yanked if it fitted all the criteria of a true credit risk mitigant – these included being irrevocable (‘guarantor can’t unilaterally pull cover – this one did), claim has to be direct ( it wasn’t – BCC (where the ‘rogue’ underwriter worked) was an Agent for IAG/TK who supplied the AA paper) and legally enforceable in all jurisdictions (hmmmmmm) ….
Some quick maths – BCC wrote total premium of about AUD in 2019.. assuming AUD10bn of RWA’S, at least AUD1bn of CET1 capital would be required for sub-IG corporate debt. BCC essentially sold GB TM AA paper that reduced CET1 to say AUD200m…. at a cost of – what – AUD20M? It probably doesn’t work that way given notes were sold on and not held on BS but it gives an idea of cost/benefit of finding who the patsy in the poker room is …..
But It’s the loss of that AA paper, I believe, that brought the house of cards down and will probably be the focus of the legal dispute…
Thanks for that, Sigma25.
Dang! Just can’t help myself. Here’s the FT link. Thanks for the heads up, Vlade.
I suppose that the concept of a company paying debts to those it owes money too instead of finding yet another middleman to do it’s job for it proved too hard to do. And I bet that some executives were payed a bonus for setting up their companies with this scheme. Seems to me too that it would be in the interest of Greensill to try and shortchange as much as they could from all those suppliers so that they could pocket the difference for themselves.
As an AR person I’m familiar with factoring, having been cold-called many times by factoring companies over the years. My opinion of the industry in general is not high. Who tries to drum up business by essentially talking people out of their own jobs?!? My conversations with factors generally do not last long to say the least.
But this –
– I mean seriously what is wrong with these people?!?!? How is this even legal? Your basic factoring seems ripe for fraud to begin with, but reverse factoring with securitization and derivatives tacked on? Talk about your prosecution futures…
And Soft Bank – aren’t they the ones who keep shoveling the dumb money at Uber for them to set on fire? What a confederacy of dunces – there was a lot of stupid that needed to come together to make this debacle happen, starting with the regulators and politicians who allow this practice to exist in the first place.
I’ve been thinking about this softbank name lately, and I keep coming up with the bad bank comparison. Softbank is a place for the new world order of the world economic forum to be financed from. They know the goals they are after will lose money while they replace the old order (unions, public transport the commons in general, making governments servants to davos, and etc…) and softbank is where there is a big pile of money to finance the losses while the global capitalist class takes over the world. Incompetence these days is more likely a ruse to cover up more nefarious goals. ymmv.
I don’t think I have enough education to fully understand what’s going on, but the examples of Uber, Lyft, Elon Musk, Softbank, lesser known things like this, lead me to speculate that there is a huge excess of money in today’s world, and the alpha predators are being extra creative in finding ways to multiply it. I think it might help if governments all over the world could find some way to tax the wealthy, but history shows that’s not going to happen, and there’s probably some horrible unexpected outcome that would result even if it did.
Financial “engineering” is usually too much for me to understand (not in this case, though), but I can’t help but think of this:
heh, I linked to a story about this in Links (I think) last week, thanks for going into more detail
Epsilon theory also has a nice take, pointing out the very high profile links of Lex Greensill with many establishment figures
It does seem that whenever I see the name ‘Softbank’ appear you can nearly guarantee there is something dubious going on.
I’m not a market watcher, but there seems to be quite a few odd things going on worldwide – Beijing has been trying to keep a lid on gyrations in the Chinese stock market, and Adam Tooze says on twitter that Japanese investors are dumping foreign bonds at a record rate.
Beware the Ides of March, one might say.
Insurance coverage of a financial instrument is dubious at the best of times. When the life of the insurance policy doesn’t extend to the life on the instrument that is almost fraudulent.
That said, Credit Suisse and other institutional buyers should have known better.
Is it just me, or does Softbank have an unusually close relationship with fraudulent, and fraud adjacent, operations?
John Hempton’s take
@Nick “The insurance industry is also exposed, in particular two firms: Insurance Australia Group Limited and Tokio Marine Holdings. The former is probably big enough to absorb a heavy blow, the latter less so.” I think you mean the other way around.
I did. Thanks for spotting the typo, Olivier, and bringing it to my attention. Duly amended.