The Collapse of Greensill

Maqro Academy Apr 14, 2021 / Reading Time: 7 mins
By Jordan Shen Reading Time: 7 mins

The finance industry has grown increasingly more diverse, with the products on offer and financing methods growing increasingly more diverse and creative. Early March saw the collapse and insolvency of Greensill Capital, a supply chain finance company based out of the UK, which also owned Greensill Bank in Germany, and this blog explores why this company failed by looking at its clients, the way it was insured and backed and how its collapse has impacted equities, while also providing a timeline of its collapse.

Greensill Clients

GFG Alliance is Greensill’s biggest client. In September 2019, Greensill’s lending facilities to the company hit about $7.4bn. The WSJ reveals much of it wasn’t traditional supply chain finance and Greensill turned to a category of loans called “future receivables” based on the projections of what the client’s business would look like over the next five years. The steel, aluminium and iron ore conglomerate is currently in dispute with Greensill over the debt. The efforts of the steel group’s efforts to disentangle itself from its financer were made complicated because Greensill has made loans to multiple entities within GFG, secured against sales made within the group. 

Bluestone Resources, a coal mining company owned by Jim Justice, the Governor of West Virginia, is another major client. Greensill made $850m in loans with some of the future receivables financed out of Credit Suisse funds.

Greensill also made loans to Telstra by paying their bills to suppliers early in exchange for a discount and then collecting the full amount from Telstra at an agreed point in the future.

CIMIC was using Greensill’s supplier payday lending schemes to push out repayment terms. Greensill was forced to step in and dump any client that went beyond 30 days. Greensill wound back its supply chain finance by around $700m since last May, to $144m at the end of December.

In 2018, Greensill partnered with Taulia to help public-sector bodies in the UK, including the NHS, speed up invoice payments. Greensill in 2019 revealed that its work with Taulia had helped pharmacies access early payments in exchange for a discount against the value of invoices. 

Many of Greensill’s loans went to a small circle of borrowers close to Lex Greensill, the founder of Greensill, as well as acquaintances and his biggest backers. The company obscured its riskier loans behind a safe but barely profitable supply-chain finance business. In some cases, the loans were given other names before they were sold on to investors in the Credit Suisse fund, obscuring who the borrowers were or the type of loan.

Some loans went to Greensill’s biggest backers. A loan for $435m was made to Softbank vision fund company. 

Greensill Capital used Credit Suisse’s group’s funds to make a $350m loan to private equity firm, General Atlantic. Part of it was put in the Credit Suisse funds, but it was obscured to investors under the name of another company. The loan is currently being refinanced.

Insurers

The majority of insurance coverage Greensill relied on was depended on a single insurer, BCC Trade Credit. Tokio Marine acquired BCC Trade Credit in a transaction that involved IAG selling its 50% interest in the underwriting agency on the 9th of April 2019. It now fully owns the business.

Marsh is Greensill’s insurance broker, and it has indicated BCC was unlikely to extend policies covering Greensill and its funding partners against possible defaults. 

Three of the four Credit Suisse funds used credit insurance to guard against defaults by companies receiving short-term financing. The insurance made Greensill’s assets appear safer to Credit Suisse’s institutional investors as the underlying credit risk of the notes is ensured by IAG. 

Financial Backers

Softbank is one of Greensill most prominent backers. In 2019, Softbank’s $100bn Vision fund injected $1.5bn into Greensill, valuing the start-up at $4bn. Since then, US$1.5bn has been written down. Softbank also made a big investment in Credit Suisse supply chain finance funds, although the timing isn’t clear. The funds however have an unusual structure in that they used a warehousing agreement to buy the assets from Greensill Capital, with no credit Suisse fund manager doing the due diligence.

Credit Suisse was a major buyer of Greensill’s supply-chain finance loans, serving as a critical form of off-balance-sheet financing for Greensill. Greensill received a US$140m loan from Credit Suisse.

Swiss fund manager GAM is a big buyer of Greensill’s notes, serving as an off-balance-sheet financing tool for Greensill’s clients. GAM holdings invested in illiquid bonds linked to Greensill in 2019 which developed into a financial scandal.  Greensill assets that ended up in GAM funds: lease payments for a Russian owned cargo plane, a loan to an acquaintance of Lex Greensill for a stake in New York skyscraper development.

US private equity firm General Atlantic invested $250m in Greensill in 2018. It had a15% stake at the time of the loan and currently owns approximately 7%. 

Greensill has a history of borrowing from its bank. The AFR revealed Greensill borrowed almost €110m from its sister bank in Germany in the months leading up to its collapse.

Timeline of the Fall of Greensill

19 June 2019: In 2019 former financial services minister Lord Paul Myners called on the UK’s financial watchdog to investigate supply-chain financing funds managed by Switzerland-based GAM holdings. It invested in illiquid bonds linked to Greensill. 

15 July 2020: Established a €110 million revolving credit facility at Greensill Bank. By February 2020, €90m was outstanding. The firm has a history of making loans to related parties which are prone to conflicts of interest. Greensill also capitalised on the government’s COVID-19 crisis loans which were introduced in the UK. Borrowers were fully liable for their debt, but the government provides accredited lenders with an 80% guarantee against the outstanding loan balance. Greensill went on to help finance companies linked to the GFG group with tens of millions of UK government-guaranteed loans. 

1 September 2020: Tokio gave a formal notice that it would not renew insurances expiring on March 1st, 2021.

15 December 2020: Greensill was courting investors for a $1bn capital raising ahead of a public float that was forecast to worth US$7bn which represented 176% revenue growth in 2019 and $143bn of financing arranged for clients in 2020. Meanwhile, Softbank was quietly starting to write off its investment in a stunning reversal from a bet it had made only a year earlier. By the end of 2020, it had substantially written down its stake. Credit Suisse, however, was highlighting the success of the fund to investors. The head of asset management listed them in a presentation as an example of the “innovative” and “higher margin” fixed-income offerings that the bank was planning to focus on.

21 February 2020: There were pressures from German regulators to reduce the exposure of Greensill’s German bank to GFG Alliance. Concerns were raised due to the high level of risk connected to a single client. Another concern was GFG founder, Sanjeev Gupta, having a history of acquiring unloved metal plants. The options for Greensill included disposing of the Gupta-linked debt or injecting more capital into the banking subsidiary. 

1 March 2021: Greensill failed to renew credit insurance cover that was critical to retaining the faith of investors in its complex packaged bonds.

3 March 2021: Greensill lost the support of its 3 insurers when it launched an unsuccessful action in the NSW Supreme court, seeking to force its insurers to renew the policies. The court judgement also revealed that Greensill knew eight months ago that its insurers, Tokio Marine, BCC and IAG was baulking at renewing US$4.6bn in policies and was unable to get new insurers to cover the invoices. After losing insurance coverage for its debt refinancing division, Greensill Capital stated its court filing that GFG had begun to default on its outstanding debts. GAM holdings ended dealings with the Greensill Capital, freezing US$842m and returning investor’s money. 

Lex Greensill tried to sell parts of its business and assets under management to private equity group, Apollo Global Management for about $US100 million, a fraction of its peak valuation of about4billion in 2019. But the deal stalled after the action against the group by regulators in Europe revealed that its insurance was under investigation.

4 March 2021: Gupta shut down the retail arm of his bank, Wyelands. It will now focus on business lending – including a suite of factoring and trade options that could replicate its Greensill funding.

5 March 2021: GFG Alliance stopped making payments to Greensill. GFG Alliance confirmed it is in talks with Greensill to stop Greensill from immediately calling in its debts – a move that could put pressure on Gupta’s steel empire.

9 March 2021: Grant Thornton was appointed as an administrator to Greensill Capital. The administrators are in continued discussion with interested parties about the purchase of Greensill assets.

As concerns from Greensill’s collapse spread, IAG’s share price tumbled 3.95%. IAG came out to deny it was on the hook for $4.6bn in insurance for Greensill bonds written by its former subsidiary, Bond & Credit Co (BCC), and defeated legal efforts by Greensill to force it to extend the insurance. 

GFG hired Ernst and Young (EY) to help it navigate the financial crisis and find alternative sources of finance to replace $6.5bn of funding.

8 March 2021: Greensill files for solvency protection, as it became unable to pay a $140m loan to Credit Suisse, whilst also citing defaults from GFG Alliance.

10 March 2021: Credit Suisse froze four of its supply chain finance funds worth a combined $10 in billion. Credit Suisse was concerned about the unclear degree of risk in Greensill’s bonds and its opaquely large exposure to the network of companies owned by Sanjeev Gupta, its fiduciary duty to investors and the company’s failure to renew insurance cover. Credit Suisse moved to protect its interests by appointing receivers from McGrathNicol to take control of its shares in Greensill. The shares were security for the $140m loans Credit Suisse made to Greensill Capital (UK). Following Credit Suisse’s freeze, stopping the flow of money, Greensill Capital filed for insolvency.

11 March 2021: Tokio Marine told investors that its exposure to the Greensill was limited and not enough to warrant a revision to its guidance. Its exposure was limited because a significant proportion of its Greensill related risk was covered by reinsurance. 

13 March 2021: Despite Lex Greensill’s efforts, US private equity company Apollo Global Management walked away from its $US60 million bid for Greensill Capital. These developments came as talks between new potential owners and Taulia fall apart.  At this point, the company had less than 6 weeks until its cash ran out and no alternative to Apollo Global Management.

17 March 2021: Credit Suisse warned it would face a charge stemming from the collapse of Greensill Capital. It revealed $50m of a $140m loan it made to Greensill last year had to be repaid. The remaining $90m was securitised against a basket of investment-grade receivables. The bank is working to recover money that its clients had put into Credit Suisse’s supply-chain finance funds and has received an additional $800m of cash which means the bank is in a position to return another $1.25bn to clients on top of the $3.1bn already distributed.