What's behind the collapse of Greensill Capital, and why does it matter?
A financial company involved in opaque products that repackaged loans has gone into administration. Is there a bigger systemic risk here?
What’s happened?
The London-based finance firm Greensill Capital, one of the world’s biggest providers of supply-chain finance (letting firms borrow to pay suppliers), filed for administration on Monday, saying it was in “severe financial distress” and unable to pay back a $140m loan called in by Credit Suisse, its main backer. It also said it had been hit by defaults from a key customer, GFG Alliance, the global metals and commodities group run by Sanjeev Gupta, which was itself looking financially unsteady and in talks with lenders this week. Greensill’s filing for administration – and potential bankruptcy – marks an astonishing unravelling of a company with close ties to the British establishment (David Cameron is an adviser) and which SoftBank backed to the tune of $1.5bn in 2019. There have been rumours of trouble for months, and the crunch came last week, when Greensill’s main insurer refused to renew a $4.6bn contract and Credit Suisse froze $10bn of funds linked to the firm. It’s bad news not just for Greensill, but potentially for its customers, some of whom may now also be at risk of going under, threatening tens of thousands of jobs worldwide.
Any buyers on the scene?
According to Greensill’s administration filing, there was only “one credible bidder”, the US private-equity firm Apollo Global Management. Apollo wanted to pay $59.5m for Greensill’s intellectual property and IT systems, in a bid that would involve keeping “the majority” of Greensill’s 500 UK employees. On Wednesday Bloomberg reported that the deal was on the verge of collapse, due to a stand-off with one of Greensill’s key technology providers, the US tech company Taulia. Apollo was only interested in acquiring those parts of Greensill that would give it access to financing lines with large companies such as Vodafone, says the Financial Times. The group had no interest in taking on any financing for Greensill’s largest customer, Gupta’s GFG Alliance. The key sticking point is that, although founder Lex Greensill talked up the firm’s tech prowess, it was ultimately heavily dependent on other companies’ platforms.
Who is Lex Greensill?
He’s the son of a sugar-cane farmer from Australia who put himself through business school in London, built an innovative fintech business, and swiftly found himself at the heart of the British establishment. Now aged 44, Greensill came to the UK in 2001, and in his 20s worked at Citigroup and Morgan Stanley. There, a close colleague and mentor was the late Jeremy Heywood, an ex-mandarin who later returned to government under Gordon Brown, and served as cabinet secretary under David Cameron and Theresa May. After setting up his business in 2011, Greensill became an adviser to the Cameron government on supply-chain financing initiatives in the public sector. After leaving office, Cameron then became an adviser to Greensill, one of very few commercial opportunities he took up. Its collapse is a major financial blow to the ex-PM, who (according to media reports) has stock options worth up to 1% of the business.
What exactly is “supply chain finance”?
The idea is to let big companies smooth out their outgoings and let smaller companies get paid quicker – all courtesy of intermediaries such as Greensill, who lend the money and take a tiny margin. But Greensill is one of a group of businesses that have put a further spin on the idea by selling off loans in order to write more, and packaging supplier debt into bond-like investments. In Greensill’s case, the major customer of the loans was Credit Suisse, which put them into funds sold to outside investors.
That’s beginning to sound risky?
Indeed. Last week Credit Suisse and the other core customer, fund manager GAM, suddenly announced they were freezing the funds, having experienced “default events”. The key to understanding the Greensill crisis is insurance, says Tom Braithwaite in the FT. With insurance covering the credit risk, investors could treat the funds as almost risk-free. But we now know that last summer Greensill’s main insurers, Tokio Marine, got cold feet and sacked the executive covering Greensill for “exceeding his authority” in writing almost $7.7bn of coverage. This year Greensill has failed to find willing insurers and last week failed in a legal effort to force their previous ones to renew the policies. Without insurers to cover Greensill’s credit risks, it’s stuck: unable to offload loans or write new ones. That’s “inconvenient for blue-chip customers such as Vodafone”, says Braithwaite; it’s “potentially devastating for lesser companies” such as those associated with metals magnate Gupta, which are among Greensill’s biggest borrowers.
Is this the end for supply-chain finance?
Supply-chain financing is entirely legitimate, and Greensill’s services were used by financially robust big businesses including Vodafone and AstraZeneca. But regulators and rating agencies regard it as worryingly opaque. Companies using such facilities are able to classify the monies owing as “accounts payable” rather than debt – and thus the system can be (and is) misused to disguise spiralling borrowing. In 2018, for example, Carillion collapsed with about £500m in “other payables” linked to supply-chain finance debts. Greensill itself has avoided regulation by the Financial Conduct Authority as it lends to businesses, not consumers. But MPs and others are now asking whether that’s sustainable.
What happens next?
Expect a lot of questions in the coming weeks – especially if Greensill’s collapse is followed by the implosion of Gupta’s empire. “Shareholders will suffer if supply-chain accounting loopholes are not closed,” says Katherine Griffiths in The Times. “Thousands of people’s jobs now depend on how sound Gupta’s finances really are.”