SoftBank Fintech Unicorn Greensill on the verge of collapse
A massive, opaque supply chain financing mess amid criminal allegations against the management of its German banking subsidiary with far-reaching ramifications.
By Nick Corbishley to the WOLF STREET:
Supply chain finance giant Greensill Capital is expected to file for bankruptcy in the UK, and its parent company in Australia has already filed for bankruptcy there after its credit insurers refused to renew $ 4.6 billion in credit insurance on March 1 . These policies provided protection against the failure of some of the holdings in Credit Suisse’s supply chain funds for which Greensill procured the assets.
Greensill warned of “catastrophic” consequences if its credit insurance were not extended. Some of the 40 customers covered could become insolvent, putting up to 50,000 jobs at risk worldwide, including thousands of jobs in the UK steel industry.
Credit Suisse, one of the company’s largest sources of funding, responded to news that credit insurance would be closed on Monday Freeze four Greensill-managed funds with a combined book value of $ 10 billion. Swiss fund manager GAM Investments followed suit on Tuesday, closing its $ 842 million GAM Greensill supply chain finance fund for subscriptions and redemptions. Both companies said they froze funds over concerns about the true value of Greensill’s assets.
On Wednesday, the German financial regulator BaFin announced that they had imposed a moratorium on Greensill Bank. The ban, which included both sales and payments, was necessary because “the bank is threatened with over-indebtedness,” said BaFin. The guard also filed a criminal complaint against the management of the bank on suspicion of balance sheet manipulation.
Greensill Bank’s largest customer, Sanjeev Guptas GFG Alliance, announced the go-ahead on Thursday evening Withholding payments.
Greensill is one of the world’s largest providers of supply chain finance, also known as “reverse factoring”. On its website, Greensill claims it had over 10 million customers in 2019 on over $ 143 billion in funding.
A company with accounts payable commissions Greensill to pay its suppliers immediately (e.g. 15 days after invoicing) against a discount on their invoices. The company will repay Greensill at a later date, converting its trade payables into a financial debt without having to report it as financial debt.
Greensill doesn’t wait for the company’s payment, instead bundles the invoices into securities and sells them to asset managers, insurance companies and pension funds. One of the biggest buyers in Greensill’s case was Credit Suisse.
For Greensill’s client firms, the fact that they do not have to disclose this financial debt from supply chain finance allows for the true amount of their debt, causing greater losses to investors and creditors if they eventually collapse. This is what happened to Spanish energy giant Abengoa when it defaulted on its debts for the first time in 2015, and NMC Health, the FTSE 100’s former private hospital company, the collapsed in 2020. Greensill customers Brighthouse Ltd. and Katerra, also supported by SoftBank, hit the wall last year.
SoftBank clearly written down the value of his $ 1.5 billion investment in Greensill in late 2020.
On Monday, Greensill’s Australian parent company tried to obtain an injunction in Australia to prevent its insurer, IAG’s Insurance Australia Limited, from providing coverage for loans to its business borrowers, without success. The company’s “Plan B” is to file for bankruptcy in the UK. According to sources cited by the WSJ, as part of the bankruptcy, the company plans to sell the core of its business and assets under management to Apollo Global Management, whose insurance companies will replace approximately $ 7 billion in corporate finance previously arranged by Greensill.
The deal is said to be around $ 100 million, compared to its valuation of $ 4.5 billion two years ago when SoftBank’s Vision Fund raised $ 1.5 billion.
Greensill has filed for bankruptcy protection under Australia’s safe harbors for the remainder of its business.
However, the sale to Apollo could be nullified by the decision of the BaFin on Wednesday to hand over the investigation against the Greensill Bank AG to the law enforcement agency. Greensill Bank was created when Greensill Capital acquired a tiny bank in Bremen, Nordfinanz Bank AG, in 2014. After the acquisition, the balance sheet grew rapidly with loans to steel magnate Sanjeev Gupta’s sprawling GFG Alliance, which owns more than 200 manufacturing facilities in 12 countries, has annual sales of $ 20 billion, and employs 35,000 people.
The corporate structure of the GFG Alliance is deeply opaque. In addition to being the primary customer of Gupta Greensill Bank, Mr. Gupta Greensill Bank is also a former Greensill shareholder. A recent audit of the banking books carried out by KPMG on behalf of BaFin showed the appalling extent of the bank’s commitment to Gupta’s companies. Reports the Financial Times.
Greensill Bank’s loan book is worth around € 3.5 billion, according to people directly familiar with the balance sheet, and more than € 2 billion relates to debt financing related to Gupta’s deals. Another amount includes UK government backed (emergency Covid-19) loans to companies associated with the Indian-born businessman, which were provided by Greensill last year, according to the Financial Times.
The bank was able to hide the extent of its commitment by presenting the loans to Gupta’s companies as loans to the companies’ suppliers. This made it appear that the bank had many different smaller borrowers, rather than one large one.
Credit Suisse also cited Greensill’s strong exposure to GFG Alliance assets as the reason for its decision to discontinue financing the four Greensill-managed funds. The credit insurance that underlies Greensill’s covered loans has been a big draw for investors who parked money in Credit Suisse’s funds, allowing them to get a decent return with low risk on the packaged loans. Without the insurance, those assets became much riskier. Greensill also relied on insurance to secure the loans of Greensill Bank, their German banking division.
Some Greensill Bank depositors could lose all or part of their deposits. Only deposits from private investors and foundations are insured in the deposit protection fund of the Association of German Banks. The deposits of institutional investors such as other banks, other financial institutions, investment firms and local authorities are not covered. According to Handelsblatt, up to 50 German municipalities had deposits with the bank, contrary to the regulations that prohibited municipalities from entrusting funds to private banks. The municipalities were apparently lured by Greensill Bank’s relatively high interest rates.
The collapse of Greensill has other possible consequences. Thousands of jobs could be lost as companies that have relied on Greensill’s supply chain finance services to prepay their suppliers are suddenly cut off from that source of funding and may have to pay all of their suppliers at once. This could trigger a destructive domino effect along the supply chain. UK taxpayers could end up on the hook for any government-backed Covid-19 loans Greensill Bank has made available to the GFG Alliance. The insurance industry is also heavily exposed as it has secured many of Greensill’s supply chain financing instruments. Any losses incurred by Credit Suisse funds could also flow to multiple parties, including credit insurers. By Nick Corbishley, to the WOLF STREET.
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