On Monday, Greensill filed for administration in the United Kingdom. It has capped a stunning collapse of its founder. Regulators have shut down the bank he owns in Germany. The funds he ran in collaboration with Credit Suisse are liquidated. His firm is in the process of being broken up with its core, perhaps sold to Athene Holding Limited, backed by Apollo.
Lex Greensill has lost his billionaire status, and the collapse has tangled up myriad strands involving everything from the steel industry to investment funds to Britain’s health care system (1).
Let’s read on to get a rundown of what happened, key figures, and what could be the next move.
The Players
Lex Greensill
Lex Greensill’s (2) rise took him from his family’s farm business in Queensland, Australia, to Wall Street banks and founding his own company. The company offers supply chain finance to companies and accelerates payments to suppliers in return for a fee. Notably, the company had planned to fundraise last year, which could have been valued at 7 billion USD.
Sanjeev Gupta
He is a former commodities trader, often dubbed as ‘ Man of Steel.’ Gupta heads GFG Alliance (3), much of the business span steel, aluminum, and renewable energy was built on a breakneck pace that witnessed him spend more than 6 billion USD within five years purchasing and revamping unloved metal assets. By far, Greensill has been his largest financial backer, and the collapse leaves him in search of new funds.
Credit Suisse
Credit Suisse Group AG (4), a Swiss lender, ran a 10 billion USD fund suite that bought securitized loans from Greensill. It is now winding down the funds and returning money to its clients. Notably, GAM Holding AG, a Swiss asset manager, has also decided to shutter Greensill-link funds. The ties additionally include a 140 million USD bridge loan Credit Suisse extended to Greensill last year.
SoftBank
SoftBank Group Corp. (5), a Japanese financial institute’s Vision Fund, a giant investor in tech startups, had put a 1.5 billion USD investment in Greensill in 2019. It has now written down the valuation and considers dropping it close to zero, as per the sources.
The Background
The crisis started at Bond & Credit company, the Sydney unit of Tokio Marine Holdings Inc, an insurance giant, last summer. It had decided not to extend policies covering the loans Greensill made and even sacked a manager who had a vital part in signing off on that business.
Compounding Greensill’s issues, about the same time, a German regulator BaFin started a probe into his fast-growing Bremen bank.
BaFin’s concern was that too many of these assets are tied to the same source; Gupta. The investigation found irregularities, including that the bank had booked claims for Gupta’s transactions that hadn’t even occurred yet but were accounted for as if they had.
While there was a slow build-up of pressure, in late 2020, Softbank also wrote down its investment in Greensill. However, it only came to light in recent weeks.
The situation further accelerated in February when BaFin’s pressure witnessed Greensill lookout for potential buyers for its exposure to Gupta. Reportedly, the company has started talks with Athene and Apollo Global Management Inc to sell some of its assets. However, the deteriorating situation had put Greensill’s backers and investors on alarm (6).
Greensill Put His Fortune and Firm At Risk
Even though Greensill is not big enough to pose dangers to the financial system, it is disturbing that his investors are still misjudging the risks of such extrinsic investment products over a decade after the banking crisis.
It was a mounting lack of faith among credit insurance along with concerns regarding the absence of light around Greensill Capital’s dealings with the steel magnate, Sanjeev Gupta, that incited his company unraveling this week.
Credit Suisse and GAM have already frozen their funds from which Greensill sourced its assets. Notably, Swiss Bank also had some serious doubts about some of its assets’ value, and such sentiments are hard to survive.
After its dismal Wirecard failure, BaFin, Germany’s financial watchdog (7), shuttered Greensill Bank, the firm associated with a German lender, and filed a criminal complaint with accounting allegations of irregularities.
The company has denied any such wrongdoings and is now preparing to file for insolvency by hopelessly attempting to sell what is left of the business (8).
Even though such swift unraveling is not uncommon when client trust is fragile and capital is footloose, Greensill’s demise is still breathtaking. The report also suggests that the company failed to address the vulnerability caused by its credit insurance dependency until it was too late.
It is worth highlighting that credit insurance was a key enticement for investors who placed money in Credit Suisse’s funds. It means that they made a decent yield while seemingly taking a little risk. However, fund investors failed to consider what can happen if Greensill could not reiterate the insurance backstop. As insurers rescinded policies underpinning these assets after Greensill’s customer defaults, it became hard to value, and the funds were gated.
While Greensill can overcome setbacks that may have sunk less forceful personalities before, he looks defeated this time.
Warnings
In spite of spending his budding career as a banker with Morgan Stanley and Citigroup Inc., until 2011, Greensill had a rough start as an entrepreneur. At first, Greensill Capital made huge losses on various supply-chain finance deals. However, gradually his idea for creating an asset class out of bundle up corporate invoices started to attract followers.
Several financial investors flock to him, first General Atlantic, whose 250 million USD investment in 2018 valued his firm at 1.6 billion USD (9). Then, Softbank poured over 1.5 billion USD at a 4 billion USD valuation the following year (10).
Greensill’s charisma and the potential 55 trillion USD addressable market for working capital finance that he explained must have appealed to the firm. But now, SoftBank’s due diligence and its skill at picking financial sector winners look rather questionable.
Nevertheless, Greensill’s business model’s core was quite innovative – purchasing invoices from companies, wrapping them into bond-like securities, and marketing these bonds to institutional investors.
Previously, mostly large banks offered invoice financing. The supply chain funds that Greensill created with funding from GAM and Credit Suisse opened doors for institutional investors. Greensill had also claimed that his company had purchased several hundred million dollars of company invoices every day.
Even though Greensill wished for sunny transparency, the company always remained something of an enigma. Greensill had benefited from a lack of accounting transparency among the corporate clients with which it struck invoice-financing deals since companies don’t often disclose these arrangements clearly in their financial statements.
Companies like Greensill pay suppliers the value of their outstanding invoices minus a discount and then seek payment later from the companies who receive the services or goods. Suppliers were happy because they get their invoices paid quickly, and the buyers of the goods and services were pleased because the payments are deferred, which helps cash flows.
Apart from making money via setting up the financing, Greensill also got a ready flow of invoices from the business to package and supply the GAM and Credit Suisse funds.
On the other hand, credit rating agencies were worried about companies’ use of supply chain finance, which they deem as a form of short-term debt that lacks transparency. Even though Carillion, a prolific user of supply-chain finance, was not a Greensill client, its collapse in 2018 prompted significant scrutiny of such financing from the agencies (11).
The rating companies also warned about businesses getting into financial difficulties if these debt-like facilities were withdrawn suddenly. It may be proven right.
While petitioning in a court in Australia this week to instruct credit insurers to continue covering 4.6 billion USD of Greensill’s supply-chain assets, the company’s lawyers warned that otherwise, some of the company’s clients were likely to become insolvent, and it would put thousands of jobs at risk (12).
A banker from a rival firm insisted that supply chain finance can be a good solution when done properly and hoped that Greensill’s demise doesn’t alter people’s perception too much even though it may have already happened. At the very least, one can expect the accounting authorities and other regulators to pay more attention to such incidents in the future.
It may appear to be already happening. Thanks to diligent news reporting, it is becoming evident how important Greensil was in financing Gupta’s steel empire, GFG Alliance. With the payment flows from aluminum, steel, and power plants, Greensill had helped Gupta acquire several metal assets.
The company has received extensive legal advice on how to classify these essays and has at all times been transparent with regulators, and auditors above that approach stated the firm.
However, without Greensill’s financial backing, Gupta is now under pressure (13).
Greensill was aware of his responsibility to depositors, regulators, and the public. According to a Bloomberg report, in 2019, every year, he has to re-sign collateral to the German Deposit Protection Authority for any depletions they may bear concerning Greensill Bank’s deposits. He added that it is an annual reminder that his family home is on the line if he decides to be foolish.
Credit Suisse Saw Early Danger Signs
According to reports, since 2019, Credits Suisse Group AG knew that the supply chain finance funds it operates with Greensill capital were too dependent on a small group of insurance to protect investors against the default and failed to remedy the situation.
Notably, it turned out to be a ticking time bomb when the insurance balked at renewing contracts, Greensill entered its abrupt collapse.
Credit Suisse deliberated over a rule in 2019 that would need the funds to secure coverage from a border set of insurance. However, it never put it in place.
The concentration further expanded until, at one point, the insurers were protecting 75% of the portfolio. By last summer, lead insurance firm Tokio Marine Holdings Inc and others warned Greensill they wouldn’t continue offering coverage, as per the court document.
The insurance was crucial since it made Greensill’s asset seems safer to Credit Suisse’s institutional investors, some of whom are within bounds from putting cash into riskier investments (14).
Credits Suisse suspended the 10 billion USD supply-chain finance funds Monday, draining the key funding source for Greensill without insurance in place. As we discussed, Greensill is now planning to file for insolvency this week in the UK. It is in talks to sell its operating business to Apollo global management Inc for a fraction of its peak valuation (15).
It is a blow for Credit Suisse’s Chief Executive Officer, Thomas Gottstein (16), who stated that he wished 2021 to be a clean slate after a damaging spy scam and one-off charges dented the bank’s financial repetition and results.
The four shelved funds invested solely in securities created by Greensill, specializing in supply chain finance, a kind of short-term cash advance to companies to draw the time they have to pay the bills.
By the 2019 summer, the funds of Greensill had grown to 4 billion USD. In Credit Suisse’s asset management, executives created a new rule that would need Greensill to diversify insurance coverage sources.
According to the rule, no single insurance covers more than 20% of the fund’s assets. If there were a dispute or one pulled out in a scenario, the whole fund would not collapse.
However, Credit Suisse’s managers decided not to implement the cap since they grew confident that trade credit insurance won’t be hard for Greensill to find if an insurer pulled out, stated sources familiar with the matter.
It is worth highlighting that the judge had rejected Greensill’s claim on March 1, highlighting that Tokio Marine and other insurers had warned Greensill of their position since the middle of the last year.
The Fallout
Greensill lost the legal fight in Australia to get Credit and Bond company to extend their insurance which lapsed on March 1. There were questions about the credit quality since no coverage was in place, leading to tough asset valuation, and Credit Suisse had to freeze its Greensill linked funds. GAM also followed suit.
On March 3, the German financial regulator also shut down Greensill bank to save money for creditors and depositors.
Even though Greensill executives desperately attempted to save the company, there was no panic denial as multiple directors left the company, including Lex Greensill’s brother.
There was also a real-world fallout with the UK National Health Service paying fees directly to pharmacies rather than relying on Greensill capital. It put further strain on its already pandemic-hit finances. Even German municipalities, which had put their money at Greensill Bank, are now at risk of losing their money.
It appears that Greensill may also take down GFG with it. Court documents indicate a warning to GFG that it would also collapse into insolvency if it loses Greensill’s finance.
The Spain government has already asked a GFG division to prove that it is solved before taking over an aluminum plant. In talks to purchase Greensill’s assets, Athene has reportedly excluded assets linked with Gupta from discussions.
The situation is fraying multiple parts of Gupta’s empire. The Bank of England has also ordered Gupta to put 75 million pounds into Wyelands Bank, which GFG owns, to return the retail deposit.
The Next Step
Greensill is in an ongoing talk with Athene after the insolvency filing with the Bermuda-based annuity seller offering approximately 60 million USD for Greensill’s IT and intellectual property, according to the court’s document. However, according to people aware of the matter, the sales talks seem to have stalled as tech partner becomes rival (17).
Additionally, Greensill still has to deal with the fallout from BaFin’s complaint.
Greensill’s fall also cuts off a key source of finance for the array of businesses that makes up Gupta’s empire. GFG is in trouble with the 35,000 people that it employs across 30 countries without fresh funds. Gupta’s operations churned out 5 million steel in 2019 and have the capacity to make more than 300,000 tons of aluminum per year. Reportedly, GFG is in talks to negotiate a reprieve on its Greensill’s debt obligations, which would help the company stave off insolvency and dodge an asset fire sale.
There is no doubt that the episode is another black eye for Credit Suisse’s risk policies and an asset management unit that was already under scrutiny. Now, the funds that the bank stated as a success story recently as December are set for a lengthy wind-down. Investors would get some cash right away but may have to face a long wait to see their assets’ real worth.
SoftBank can mark this bet down as something that didn’t work out. Now, the investing giant is most likely to turn its attention to ensure that other startups it backs that got funds from Greensill can look for ways to replace the funding (18).
