The collapse of Lex Greensill’s business empire has left a messy international trail across several countries, including the UK, Germany, Switzerland and Australia. Former UK prime minister David Cameron, the German federal government, Softbank, and steel magnate Sanjeev Gupta are just a few of the more eye-catching stakeholders involved.
So what actually happened and how are all of these parties involved in the story? Here’s a broad summary of the story so far.
What was Greensill Capital and why did it collapse?
London-based Greensill Capital was one of the world’s biggest providers of supply-chain finance. (You can learn more about supply-chain finance in our previous article on Greensill).
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Greensill filed for administration on 9 March. The firm was “in severe financial distress” and unable to repay a $140m loan owed to its main backer, Swiss banking giant Credit Suisse. Part of Greensill is based in Australia, so the company has received some respite from insolvent-trading laws in the country. The supply chain financial services firm said it was also suffering thanks to defaults from global metals and commodities group GFG alliance, which owns Liberty Steel and is run by the company’s chief executive and chairman Sanjeev Gupta.
Things went haywire after a little known insurance company called Bond and Credit company decided to not renew Greensill’s insurance policies worth $4.6bn, which triggered a snowball effect.
So, who is involved?
Some of the biggest stakeholders include Credit Suisse, Japanese investment group SoftBank, steel maker Liberty Steel and the German government.
Credit Suisse is one of the most heavily affected stakeholders due to the large exposure it had to four of Greensill’s supply-chain funds, worth $10bn before the bank chose to freeze them on 1 March. The bank had also given a $140m loan to Greensill in 2020.
Credit Suisse has so far recovered $5.4bn, but stressed that three borrowers are “driving valuation uncertainty” in investments made across four funds. These are Sanjeev Gupta’s GFG Alliance which owns Liberty Steel, Bluestone Resources and Katerra, a construction start-up backed by Softbank. Gupta’s GFG Alliance owes Credit Suisse $1.2bn, Katerra owes it $440m, meanwhile $690m is due from Bluestone Resources, as cited in MarketWatch.
Gupta’s Liberty Steel is at the heart of the scandal and faces the spectre of thousands of job cuts. UK business secretary Kwasi Kwarteng has urged Gupta – who was once touted as the savior of British steel firms – to find new funds for its 3,000 workers, spread across 11 British plants. The government also rejected a request from Gupta for £170m to finance the day-to-day operations of the company and help it stay afloat.
SoftBank, the Japanese multinational conglomerate, had invested at least $400m into Greensill Capital at the end of the year, reports The Wall Street Journal, in addition to the $1.5bn which was invested in 2019 by the Vision Fund.
The crisis also involves a unique set of stakeholders: German local authorities. German towns had held around €500m euros with Greensill bank, based in Bremen. Why? Greensill Bank did not charge negative interest rates, in contrast to most other banks who have done since the ECB cut rates below zero in 2014 in a bid to reinvigorate the eurozone economy.
German regulator BaFin froze the bank’s and filed a criminal complaint over potential balance sheet manipulation, days before the fall of Greensill Capital. And, while Greensill Bank’s lack of negative rates was attractive to German towns, the money was not covered by deposit insurance.
What is supply-chain financing and how will the fall of Greensill affect the market?
The supply-chain finance market was enjoying a stellar year having grown 35% in 2020 to a total value of $1.3trn, according to the latest World supply-chain finance report.
It can take many forms, but it typically uses a technique known as reverse factoring, which allows a corporate buyer to partner with a bank or alternative provider to allow suppliers to be paid early for their invoices.
Critics of the supply-chain finance industry say that such arrangements can be used by companies to push suppliers to accept unusually long payment terms. They are also recorded as trade payables, rather than debt. This can conceal the true level of a company’s financial leverage.
Greensill divided bills and invoices from supply chain companies and packaged them into bond-like investments. Greensill then sold these to investors such as Credit Suisse and banked a profit. In a very low-yield environment, it is not hard to see why these funds may have been attractive to investors.
Erik Hofmann, professor of supply-chain management at University of St.Gallen, says the debacle could trigger a fatal loss of confidence in supply-chain finance and prompt a “domino effect” of investors withdrawing funding.
Why is David Cameron at the centre of the scandal?
Former prime minister David Cameron has largely avoided the public eye since stepping down after the EU referendum, but he has found himself back in the limelight over recent weeks for all the wrong reasons.
While Cameron was prime minister, he appointed Lex Greensill as an unpaid adviser. Upon leaving office, Cameron went to work for his company, making a number of unsuccessful attempts, through various text messages and meetings, to convince ministers to give Greensill access to some government-guaranteed loans.
The revelations have prompted the UK government’s Treasury Select Committee to launch an inquiry into the company’s collapse, with Chancellor Rishi Sunak is expected to appear before it. Cameron is expected to appear in front of one of the Commons public accounts committee, the public administration or the constitutional affairs committees. The former prime minister’s alleged role has also fostered debate on the nature of UK’s lobbying rules.
What does this mean for your money?
In terms of how the scandal will affect investors, the most obvious expected effect would be a fall in Credit Suisse’s shares, so investors who have bought could suffer some losses. Shares have fallen around 27% since 1 March when the bank froze Greensill funds, although some of this loss is also related to Credit Suisse’s exposure to family office Archegos who defaulted on a margin call last month.
Credit Suisse is also considering letting clients foot some of the losses generated by Greensill, as the bank believes the risks were known to investors, Bloomberg reports. Credit Suisse estimates another $2.3bn is still at risk even though it has so far recovered $5.4bn.
Some of Greensill’s clients who have lost funding may have to repay debts early or find other sources of financing. If you do not have exposure to any of Greensill’s clients, then there should be limited impact.
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