Since it was founded a decade ago, Greensill Capital has grown explosively to become one of the biggest providers of supply-chain finance.
But the group, which is backed by SoftBank and advised by former UK prime minister David Cameron, is now racing to strike a rescue deal after Credit Suisse froze $10bn of funds linked to the firm.
The crisis has turned the spotlight on supply-chain finance, a controversial technique that has drawn the ire of regulators, rating agencies and accountants.
What is supply-chain finance?
It is sometimes called “reverse factoring”, because it is a new spin on a centuries-old technique of raising money from invoices.
In practical terms, the process involves a financial institution agreeing to pay the bills a company owes to its suppliers. The trade-off for the suppliers, frequently smaller companies with large multinational clients, is that they get paid quickly, albeit slightly less than they are owed.
The financial institution later collects the full amount of the invoice from the large company, which is in effect paying a small fee to smooth its lumpy payment schedules.
Greensill arranges this type of funding for companies either through a bank it owns in Germany or by packaging these supplier bills up into bond-like investments for the Credit Suisse funds. It makes money from being the middleman between companies and investors.
The firm also does traditional factoring — in which a company sells on its customer invoices at a discount.
Why is it controversial?
The short answer: its accounting treatment.
While a company that uses supply-chain finance owes money to a financial institution, accountants do not class these facilities as debt. Instead a company typically books the money owed in the “trade payable” or “accounts payable” line of its balance sheet, mingled in with all the other bills owed to suppliers.
While a footnote to the accounts might explain how much of this line is made up of money actually owed to financial institutions, rather than suppliers, there is no requirement to disclose it.
The lack of disclosure has troubled both rating agencies and regulators, including the US Securities and Exchange Commission. The Big Four audit firms also wrote a joint letter to US accounting watchdog FASB in 2019, asking for “greater transparency and consistency” in financial disclosures.
Why can it prove dangerous for companies?
Supply-chain finance is a legitimate and increasingly common tool for large multinational companies.
But the lack of disclosure means that it has also proved popular with struggling companies looking to mask their mounting borrowings. When nervous lenders yank these facilities from heavily indebted companies, it can create an effect similar to a bank-run on their working capital position.
Supply-chain finance was at the heart of the 2015 collapse of Spanish clean energy company Abengoa. Greensill arranged financing for the Spanish company through an off-balance-sheet vehicle.
Before its demise in 2018, UK construction group Carillion made heavy use of the government’s supply-chain finance programme. MPs investigating the outsourcer’s demise said the scheme allowed it to “prop up its failing business model”.
While Carillion was not a client of Greensill, Lex Greensill, the finance company’s founder, helped devise the government scheme it drew on when he worked as an adviser to then prime minister Cameron in 2012.
Potentially toxic for weak companies, supply-chain finance can be a gold mine for short sellers who comb through corporate filings looking for its excessive use. When US hedge fund Muddy Waters released a report alleging fraud at hospital operator NMC Health in December 2019, it included references to the FTSE 100 company’s use of the Greensill-linked Credit Suisse funds.
Less than six months after the report, NMC filed for administration.
Did Lex Greensill invent supply-chain finance?
Lex Greensill, a 44-year-old former investment banker, has said that the idea for his company was shaped by his experiences growing up on a watermelon farm in Australia, where his family endured financial hardships when large corporations delayed payments.
But he did not invent supply-chain finance — banks in the US and Europe have provided this type of financing to clients for decades.
However, his firm has been at the cutting edge of creating even more complicated structures for certain companies. The FT revealed last year that SoftBank had poured more than $500m into the Credit Suisse funds, which then made big bets on the debt of struggling start-ups backed by the Japanese technology conglomerate’s Vision Fund.
Greensill was at the heart of this circular flow of financing, having both sourced the assets for the fund, as well as counting SoftBank’s Vision Fund as one of its own shareholders.
What happens to Greensill’s clients?
That depends. Credit Suisse’s $10bn fund freeze means it is no longer able to invest in new supply-chain finance paper, which could in theory throw a company’s funding into turmoil.
Clients such as Vodafone and AstraZeneca with strong investment-grade ratings will use several different supply-chain finance providers and should have little trouble finding demand elsewhere.
Alongside considering a deal to buy some of Greensill’s operating assets, private equity group Apollo is looking to take over some of these valuable supply-chain financing relationships with blue-chip companies through one of its insurance affiliates.
But lower-rated companies without broader access to funding may face a bumpier ride. Sanjeev Gupta, a British industrialist and one of Greensill’s closest clients, is under particular scrutiny.
German financial regulator BaFin is pushing Bremen-based Greensill Bank to reduce its exposure to Gupta, after probing the lender’s balance sheet and raising concerns around the level of risk connected to a single client.
Apollo has specifically ruled out taking on any financing for the Indian-born industrialist. Gupta’s efforts to borrow hundreds of millions of dollars from Canadian asset manager Brookfield have also foundered.
A spokesman for Gupta’s GFG Alliance said it “has adequate funding for its current needs and its refinancing plans to broaden its capital base and obtain longer term funding are progressing well”.
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