A massive murky mess of supply-chain finance, amid criminal allegations against the management of its German bank subsidiary, with wide repercussions.
By Nick Corbishley for WOLF STREET:
Supply chain finance giant Greensill Capital is expected to file for insolvency in the UK, and its parent company in Australia has already filed for insolvency there, after its credit insurers refused to renew $4.6 billion in credit insurance policies on March 1. Those policies provided protection against default of some of the holdings in the Credit Suisse supply-chain funds for which Greensill sourced the assets.
Greensill warned of “catastrophic” consequences if its credit insurance policies are not renewed. Some of the 40 clients covered could become insolvent, it said, putting at risk as many as 50,000 jobs globally, including thousands of jobs in the UK’s steel industry.
Credit Suisse, one of the firm’s biggest sources of funding, responded to the news that the credit insurance had lapsed on Monday by freezing four funds managed by Greensill with a combined book value of $10 billion. Swiss fund management giant GAM Investments followed suit on Tuesday by closing its $842 million GAM Greensill Supply Chain Finance fund to subscriptions and redemptions. Both companies said they had frozen the funds due to concerns about the true value of Greensill’s assets.
On Wednesday, Germany’s financial regulator BaFin announced that it had imposed a moratorium on Greensill Bank. The ban, covering both disposals and payments, was necessary because of “an imminent risk that the bank will become over-indebted,” said BaFin. The watchdog also filed a criminal complaint against the bank’s management for suspected balance sheet manipulation.
On Thursday night, Greensill Bank’s biggest client, Sanjeev Gupta’s GFG Alliance, announced that it had begun withholding payments.
Greensill is one of the world’s biggest providers of supply chain finance, also called “reverse factoring.” On its website Greensill claims that it issued over $143 billion in funding to over 10 million customers in 2019.
A company with accounts payables hires Greensill to pay its suppliers promptly (e.g. 15 days after invoicing) in return for a discount on their invoices. The company repays Greensill at a later date, thereby converting its trade accounts payable into a financial debt, without having to disclose it as financial debt.
Greensill, rather than wait for the payment from the company, bundles the invoices into securities and sells them to asset managers, insurers, and pension funds. In Greensill’s case, one of the biggest buyers was Credit Suisse.
For Greensill’s client companies, the fact that they don’t have to disclose this financial debt from supply chain finance allows them to conceal the true size of their debts, leaving investors and creditors with bigger losses when they finally do collapse. That’s what happened with Spanish energy giant Abengoa when it defaulted on its debt for the first time in 2015, and NMC Health, the former FTSE 100 private hospital company that collapsed in 2020. Greensill clients Brighthouse Ltd. and Katerra, also backed by SoftBank, also hit the wall last year.
SoftBank wrote down significantly the value of its $1.5 billion investment in Greensill at the end of 2020.
On Monday, Greensill’s parent company in Australia tried to secure a court injunction in Australia to prevent its insurer, IAG’s Insurance Australia Limited, from pulling coverage for loans extended to its business borrowers, to no avail. The company’s “plan B” is to file for insolvency in the UK. According to sources cited by the WSJ, as part of the insolvency, it plans to sell off the rump of its business and assets under management to Apollo Global Management, whose insurance affiliates will replace around $7 billion in financing for corporate clients that had previously been arranged by Greensill.
The deal is reportedly for around $100 million — compared to the $4.5 billion valuation two years ago, when SoftBank’s Vision Fund provided $1.5 billion of funding.
Greensill has sought insolvency protection under Australia’s safe harbor laws for the rest of its business.
But the sale to Apollo could be scuppered by BaFin’s decision on Wednesday to turn its investigation of the firm’s banking unit, Greensill Bank AG, over to criminal prosecutors. Greensill Bank came about when Greensill Capital acquired in 2014 a tiny bank in Bremen, Nordfinanz Bank AG. Following the acquisition, its balance sheet grew rapidly with loans to steel magnate Sanjeev Gupta’s sprawling company GFG Alliance, which owns more than 200 manufacturing assets in 12 countries, generates annual revenue of $20 billion, and employs 35,000 people.
GFG Alliance’s corporate structure is deeply opaque. Not only is Mr Gupta Greensill Bank’s number one customer, he is also a former Greensill shareholder. A recent audit of the bank’s books conducted by KPMG at BaFin’s behest revealed the staggering scale of the bank’s exposure to Gupta’s companies, reports the Financial Times.
Greensill Bank’s loan book is around €3.5bn in size, according to people directly familiar with its balance sheet, and more than €2bn relates to receivables financing connected to Gupta’s businesses. A further amount comprises UK-government backed (emergency covid-19) loans to entities connected to the Indian-born businessman, which the Financial Times revealed last year had been provided by Greensill.
The bank was able to hide the extent of its exposure by presenting the loans to Gupta’s businesses as loans to the businesses’ suppliers. This made it appear that the bank had lots of different smaller borrowers instead of one big one.
Credit Suisse also cited Greensill’s heavy exposure to GFG Alliance assets as a reason for its decision to cut off funding to the four funds managed by Greensill. The credit insurance underpinning Greensill’s invoice-backed loans had been a major draw for investors who parked money in the Credit Suisse funds, allowing them to earn a decent yield from the packaged loans while taking little risk. Without the insurance, those assets became a lot riskier. Greensill also relied on insurance to protect the loans held by Greensill Bank, its German banking arm.
Some of Greensill Bank’s depositors could lose some or all of their deposits. Only the deposits of private investors and foundations are insured by the deposit protection fund of the Association of German Banks. The deposits of institutional investors such as other banks, other financial institutions, investment firms, and local authorities are not covered. According to Handelsblatt, as many as 50 German municipalities had deposits at the bank, in contravention of rules forbidding local authorities from entrusting funds with private banks. The municipalities were apparently lured by the relatively high interest rates Greensill Bank offered.
There are other possible repercussions of Greensill’s collapse. Thousands of jobs could be lost as companies that have grown to rely on Greensill’s supply chain finance services to pay their suppliers early may suddenly be cut off from this source of funding, and may have to pay all of their suppliers all at once. This could set off a destructive domino effect along supply chains. British taxpayers could end up on the hook for all the government-backed Covid-19 loans Greensill Bank provided to GFG Alliance. The insurance industry is also heavily exposed since it has provided protection for a lot of Greensill’s supply chain finance instruments. Any losses to the Credit Suisse funds could also flow to multiple parties, including credit insurers. By Nick Corbishley, for WOLF STREET.
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