Supply chain finance and the collapse of Greensill Capital

One of the world’s leading supply chain finance companies, Greensill Capital, collapsed this week. [1] The collapse threatens a vast web of companies linked to Greensill, substantial losses for investors, and tens-of-thousands of jobs. It also highlights the risk embedded in the financial system with supply chain finance, which has been used to disguise mounting debt at troubled firms.

Lex Greensill is a 44-year-old Australian whose family runs a melon and sugarcane farm. He arrived in London in 2001 and quickly rose through the ranks of finance at Morgan Stanley and Citigroup. After founding Greensill Capital in 2011, he advised then British prime minister David Cameron on a supply chain finance initiative. Cameron would later become an advisor to Greensill Capital. By 2019, SoftBank’s Vision Fund had invested $1.5 billion in the company launching Greensill’s (temporary) status as a billionaire. Last year the company was considering a new funding round which would have valued it at $7 billion.

Greensill Capital specializes in reverse factoring where companies borrow money to pay suppliers and extend/smooth their payment terms. Greensill funds these contracts through a subsidiary bank (Greensill Bank) or by packaging them as bond-like investments for funds managed by larger banks like Credit Suisse. These investments are then backed by large insurance policies including a $7.7 billion policy from Tokio Marine. Similar to the credit default swaps backed by AIG in 2008, insurers play a critical role—and risk—in these complex investment products. Greensill’s collapse this week was triggered when Credit Suisse suspended its $10 billion fund after learning Greensill’s insurance backing the fund had expired. [2]

Reverse factoring is similar to (forward) factoring but led by buyers who sell their supplier’s invoices to banks and investors through financial products packaged by firms like Greensill, Morgan Stanley and many others. With reverse factoring, a company’s suppliers are paid quickly by the financial institution—though at a discount from what they are owed—and the institution then collects from the buyer on longer payment terms than what they would have received from their suppliers. This helps smooth lumpy payment schedules and increase working capital. [3] (Miguel Garcia Gonzalez published a brief overview of reverse factoring and supply chain finance in our December 11 issue. )

Supply chain finance also is controversial. Reverse factored invoices, for example, are treated as accounts payable on balance sheets masking the fact that money is owed to a financial institution which would typically be classified as debt in public accounting records. There also have been several high-profile companies that collapsed from unraveling supply chain finance contracts. Abengoa, a Spanish renewable energy company, narrowly avoided the largest bankruptcy in Spanish history by restructuring €8.9 billion in debt and owing billions more to suppliers. [4]

Carillion, one of the biggest construction and support-services companies in the UK, met a worst fate in 2018. Carillion ran into cash flow problems after aggressive bidding on projects squeezed their margins. To prop up their business they used supply chain financing provided by the UK government. Lex Greensill helped devise the UK program as an advisor to then prime minister David Cameron.

The tipping point for Carillion came with supplier issues and cost overruns on several projects. Heavily dependent on outsourced resources, the company had no meaningful assets to sell other than its contracts, and those contracts had margins too low to cover its growing liabilities—supply chain finance contracts were specifically called out by the UK investigation. After failing to reach a deal in last-minute talks with the government and bankers, Carillion was liquidated abandoning more than 43,000 employees and threatening the solvency of hundreds of subcontractors and smaller businesses. [5]

Though Greensill Capital did not provide supply chain financing to Carillion—Lex Greensill did help develop the UK program—the company has been embroiled in controversy for years. Its financing was at the center of the 2018 crisis that rocked Swiss firm GAM Holdings and British metals magnet Sanjeev Gupta’s GFG Alliance. [6] Greensill’s financing also was linked to billions of dollars of hidden debts and potentially fraudulent transactions at hospital operator NMC Health, which went bankrupt last year. [7]

Lex Greensill is not phased by controversy. “We’re doing things a little different to what’s been done before, and that’s always going to kind of garner attention and commentary.” [8]

Last year, Greensill’s Credit Suisse funds were hit by a wave of defaults including NMC Health, commodities trader Agritrade, and “rent-to-own” retailer BrightHouse. [9] In July, the fund’s primary insurance provider Tokio Marine notified Greensill it was not renewing existing insurance coverage or taking on any new policies from the company. The insurer found the underwriter in charge of the policy had exceed the amount they were authorized to insure. They investigated “dealings” between the underwriter and Greensill, and other areas where the underwriter had acted “outside the scope of his delegated authority.” [10] After losing its primary coverage, Greensill scrambled to find other insurers to step in. When that failed it sued its existing insurers in an attempt to force them to restore coverage.

The insurance policies backing the Credit Suisse fund lapsed this weekend resulting in the bank suspending redemptions and subscriptions. [11] Greensill also was denied the injunction it sought against its insurers by an Australian court Monday night. By Wednesday the company was preparing to file for insolvency in the UK and was in talks with US private equity firm Apollo Global Management to sell off the more attractive pieces its business. Germany’s financial watchdog BaFin has frozen the operations of Greensill Bank, a German subsidiary of Greensill Capital, and filed a criminal complaint against the company for suspected balance sheet manipulation. [12] Yesterday, one of Greensill’s biggest clients—and a previous counterpart in the GAM crisis—GFG Alliance suspended payments for its outstanding Greensill debt. And today (Friday) Credit Suisse announced it would begin liquidating the $10 billion fund it froze earlier in the week.

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[1] Much of this review is based on a series of articles in the Financial Times, including this compilation. Bloomberg also featured a profile of Lex Greensill a few weeks before the collapse—coincidence?