The Business Times

The swift collapse of a company built on debt

Greensill Capital's dazzlingly fast failure has ignited concerns about opaque accounting practices.

Published Tue, Mar 30, 2021 · 05:50 AM

London

THE courthouse should have already been closed for the day.

At a hearing that began at 5pm on March 1, lawyers for Greensill Capital desperately argued before a judge in Sydney that the firm's insurers should be ordered to extend policies set to expire at midnight. Greensill Capital needed the insurance to back US$4.6 billion it was owed by businesses around the world, and without it 50,000 jobs would be in jeopardy, they said.

The judge said no; the company had waited too long to bring the matter to court.

A week later, Greensill Capital - valued at US$3.5 billion less than two years ago - filed for bankruptcy in London. An international firm with 16 offices around the world - from Singapore to London to Bogotá, Colombia - was insolvent.

Greensill's dazzlingly fast failure is one of the most spectacular collapses of a global finance firm in over a decade. It has entangled SoftBank and Credit Suisse and threatens the business empire of British steel tycoon Sanjeev Gupta, who employs 35,000 workers throughout the world.

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Greensill's problems extend to the United States, where the governor of West Virginia and his coal mining company have sued Greensill Capital for "a continuous and profitable fraud" over US$850 million in loans.

At the centre of it is Lex Greensill, an Australian farmer-turned-banker, who in 2011 founded his company in London as a solution to a problem: Companies want to wait as long as possible before paying for their supplies, while the companies making the supplies need their cash as soon as possible.

To Mr Greensill, 44, it was personal. He recalled watching his parents, who had a sugar cane and melon farm, struggle financially because of long waits for payments for their produce. He said it bothered him that banks would offer loans only to large firms and their suppliers, leaving small and midsize companies in the lurch.

It was "the thing that frustrated me to extremes", Mr Greensill said in October 2011, speaking at Manchester Business School, his alma mater. Mr Greensill positioned his firm as a middleman that would pay the suppliers faster - minus a small percentage as the cost of getting quick payment - and then allow time for the buyer to pay back the middleman.

It is called supply chain finance, and it is a traditional form of lending in the business world.

But Mr Greensill added an extra layer of complexity. He took the supplier invoices, turned them into short-term assets and put them into funds, similar to money market funds, that investors could buy. The funds were sold through Credit Suisse, the big Swiss lender, and a Swiss asset management firm called GAM. The money from investors helped to pay back suppliers.

Greensill Capital turned a mundane finance practice into an ultra-lucrative business in part because it was able to shuffle around the risk, pushing some of it onto insurance companies and other financial firms. It has echoes of the asset-backed securitisation that was at the heart of the 2008 financial crisis.

As his company grew, Mr Greensill collected well-connected friends - and private jets. He helped British Prime Minister David Cameron's government set up a supply chain finance programme in 2012. He told The Australian newspaper that he did the same for President Barack Obama in the United States.

Eventually, Mr Cameron would become an adviser to Greensill Capital. Julie Bishop, Australia's former foreign minister, also joined the company as an adviser.

Greensill Capital's defining year was 2019, when SoftBank's Vision Fund, the US$100 billion investment vehicle built to make huge bets on disruptive technology companies, invested US$1.5 billion. On the day the first of two SoftBank investments was announced, Mr Greensill told Bloomberg TV that his company would have "multiple opportunities" to work with SoftBank and the other companies in their portfolio.

Mr Greensill had become a billionaire.

Promoted as a "win-win" for buyers and suppliers, supply chain finance can obscure problems on a company's balance sheet. The money a buyer owes to the middleman, such as Greensill Capital or a bank, shows up as a "trade payable" or "accounts payable" - that is, money owed to a supplier - rather than as debt. It can be a hidden form of borrowing if it is not disclosed - and there is no accounting rule that requires it to be disclosed.

Supply chain finance "exists for a reason", said S Alex Yang, an associate professor at the London Business School. "But now a lot of big companies are really abusing it."

For Greensill Capital, signs of trouble began appearing in 2018, the year before SoftBank made its big investments.

GAM, the Swiss asset manager, rocked the London financial community when it suspended one of its top fund managers, Tim Haywood. He later lost his job for "gross misconduct", Bloomberg reported, after an internal investigation raised questions about investments he made in companies tied to Mr Gupta, who was fast becoming a steel and metals tycoon. The middleman in the deals, Bloomberg said, was Lex Greensill.

The next year, Mr Greensill's debt funds were attracting unusual interest from SoftBank. Even as the Vision Fund was investing in Greensill Capital, a different arm of SoftBank poured hundreds of millions into the Credit Suisse funds, according to people with knowledge of the transactions. That arrangement put SoftBank in a complex position: One division was Greensill Capital's largest shareholder, and another was a lender to Greensill Capital via the Credit Suisse funds.

Other danger signals flashed in Germany, where Greensill Capital had acquired a retail bank. An audit in 2019 found Greensill Bank was overly exposed to Mr Gupta's companies. That attracted the interest of BaFin, Germany's bank regulator. This month, BaFin said it had uncovered evidence that assets linked to Mr Gupta listed on the bank's balance sheet did not exist.

Even as red flags cropped up, Greensill Capital remained in high esteem among British officials. In June, it was named an accredited lender for special state-backed loans to support businesses during the pandemic.

And Lex Greensill made one of his company's apps available free to some National Health Service workers, allowing them to be paid quickly and more frequently than they normally would.

Ultimately, the tipping point was the insurance.

Tokio Marine Management, the parent company of Greensill Capital's insurance provider, said last July it would no longer extend two policies that were underwriting Greensill Capital's clients, the buyers in the supply chain, and protecting investors in the Greensill Capital-linked funds.

Greensill Capital was unable to find another insurer willing to offer the coverage, according to Australian court documents. Alarmed by the lack of insurance, Credit Suisse froze the Greensill Capital funds, by then worth US$10 billion.

At Credit Suisse, the reckoning since the bankruptcy filing has been widespread. It has returned US$3 billion in cash to investors in the funds and said it was working to recover more money. It has also acknowledged that it was likely to suffer losses from a US$140 million loan it had made to Greensill Capital.

And the bank said that it had replaced the head of its asset management division and suspended bonuses for senior executives involved in the Greensill Capital funds.

The fate of Greensill Capital, now insolvent, is bleak. A plan to sell parts of its business to Apollo Global Management, the US investment giant, fell apart. Mr Greensill declined to comment for this article.

SoftBank has already written down much of the value of its holdings in Greensill Capital, and its stake is likely to be wiped out in the lender's insolvency proceedings, another high-profile loss after it was forced to rescue WeWork in late 2019.

And in Germany, a judge has granted BaFin's request to begin insolvency proceedings for Greensill Bank.

In the US, Greensill Capital had added a twist to its financing model: lending money based on a business's potential future sales, court papers show, not just past transactions, heightening the levels of risk.

Governor Jim Justice of West Virginia and his coal mining company, Bluestone Resources, sued Greensill Capital for fraud on March 15 in federal court, arguing that Greensill Capital misled them into deepening their ties without disclosing its financial troubles.

Before it collapsed, Greensill Capital lent Bluestone US$850 million, much of it borrowed against "prospective receivables", which are sales that have not happened yet.

Greensill Capital's "sudden and unjustified abandonment of Bluestone" are a "clear and present threat" to Bluestone, the lawsuit says.

The London-based GFG Alliance, Mr Gupta's string of companies, has now lost its main financier. The future of the companies and their 35,000 jobs remains uncertain.

"Greensill's difficulties have created a challenging situation," GFG said in a statement. The companies have "adequate funding" for current operations but are looking for other sources of long-term financing, it said. Even though steel prices are relatively high, GFG has been hampered by the pandemic, with some mills shut or operating intermittently.

In Britain, where Mr Gupta's companies employ 5,000, trade unions are concerned about job losses. For some, Mr Gupta is still seen as a job saver for buying unwanted plants. In France, where about 2,000 jobs are in jeopardy, the finance minister, Bruno Le Maire, said the government would be ready to intervene to prevent job losses.

One of the vulnerable French plants is Alvance Aluminium Poitou, an ailing foundry snapped up by Mr Gupta in 2019. The company, which is bleeding cash, got an 18 million euro (S$28.5 million) state-backed loan in December from Greensill Bank.

But two days later, the bank abruptly pulled back the funds, said Jean-Philippe Juin, a member of the Confédération Générale du Travail labour union representing the factory, where 600 people work.

While GFG said it had "strong cash flows" across the group, the workers at the Poitou plant were warned last week that there might not be enough money to pay their salaries for March, Mr Juin said.

"Mr Gupta presented himself to us as a saviour, with hopeful words and many promises," Mr Juin said. "In the end, he turned out to be an empty shell." NYTIMES

  • Eshe Nelson is a reporter in London, where she writes about companies, the British economy and finance.Jack Ewing writes about business, banking, economics and monetary policy from Frankfurt; he was previously European regional editor at BusinessWeek magazine in Frankfurt.Liz Alderman is the Paris-based chief European business correspondent; she was previously business editor of what was The International Herald Tribune.

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