Just months after being touted for a US$7bn IPO, Greensill is no longer in business. The London-headquartered fintech spiralled into insolvency in March after insurance cover lapsed and vital funding sources were frozen. John Basquill investigates the practices and products that propelled Greensill’s meteoric rise – and brought it crashing back to earth.
When GTR conducted an interview with Lex Greensill in March 2020, the Australian entrepreneur – founder and chief executive of London-based supply chain finance (SCF) provider Greensill – was quick to fire a warning to the company’s traditional bank competitors.
“I think the days of supply chain finance, as it stands today, are very much numbered,” he said. “It will be replaced with a newer model that is based on big data, and I think that tectonic shift is going to impact all players in the market. We’re just at the very earliest stages of that.”
Almost exactly a year later, as this publication goes to print, the picture could not be more different. Though the SCF market thrived during the Covid-19 pandemic, with buyers and suppliers generally able to maintain access to liquidity during an unprecedented crunch in economic activity, Greensill is no more.
During March 2021, Greensill entities in Australia, the UK, Germany and the US all started insolvency proceedings or filed for bankruptcy protection. Hundreds of employees have been laid off, legal challenges are emerging, and investment funds are warning of losses running into the billions of dollars.
For some time, concerns had been growing about Greensill’s exposure to a single client: GFG Alliance, a loose network of companies linked to steel magnate Sanjeev Gupta. That had already prompted German regulator BaFin to review lending activity at its Bremen-based entity, Greensill Bank, with a view to conducting a full audit.
But suspicions behind the scenes rapidly spiralled into a crisis at the start of March, after Credit Suisse issued a notice to investors suspending two SCF-related funds, which together provided around US$10bn in financing to Greensill.
In its statement, the bank said some of those funds’ assets were “subject to considerable uncertainties with respect to their accurate valuation”, and the decision to freeze them was taken “to prevent any detriment to the subfunds and their investors”.
At the time, a Greensill spokesperson emphasised to GTR that the decision had been taken “temporarily”, but said the company was in “advanced talks with potential outside investors” about taking over part of its business.
Greensill representatives were informing interested parties that the company’s non-GFG Alliance business – reportedly a robust set of investment grade corporates using straightforward SCF programmes – would be taken over by a subsidiary of private equity firm Apollo Global.
Sources close to the deal insisted on March 9 that an agreement was imminent, with the takeover price pegged at around US$60mn. However, that evening, it emerged that talks had stalled, following a breakdown in discussions over the role of San Francisco-based SCF platform provider Taulia.
Taulia’s platform allows suppliers to request early payment, with that transaction funded by external partners. It has historically had a close relationship with Greensill as a funder, though Taulia employs a multi-funding model and has also partnered with other institutions such as JP Morgan and UniCredit.
GTR understands that issues emerged because suppliers using Taulia’s platform are ultimately Taulia’s clients, and not Greensill’s. That means that even if the acquisition of Greensill’s SCF business had gone ahead, transactions that were previously funded by Greensill could be funded by those other banks instead.
When contacted, a spokesperson for Taulia confirmed it has been in talks with Apollo. Its priority, they explained, was ensuring customers still have “flexibility in the source of funding” for those early payments.
“Following the recent, well-documented challenges faced by Greensill we have been working to ensure that our clients have continued choice over their funding source(s) and continuation of funding,” they said.
The acquisition collapsed and insolvency proceedings began, bringing down the curtain on Greensill’s remarkable 10-year foray into trade and supply chain finance.
Collapse triggered by insurance row
In the days after Greensill’s downfall, it emerged from court documents in Australia that the collapse was triggered when US$4.6bn in insurance cover fell away overnight.
Trade credit insurance cover was vital for much of Greensill’s lending. In effect, it enabled Greensill to create packages of notes containing both investment grade and sub-investment grade loans. Because those notes had insurance cover, they could be sold to investors as low-risk but high-yield products.
Problems with Greensill’s insurance first arose in July 2020, when Australia’s Bond and Credit Company (BCC) said it did not intend to renew or extend policies due to expire at the end of February 2021.
Greensill pushed for renewal, and later sought alternative cover through its broker Marsh, but was unsuccessful.
On March 1, the company sought a last-ditch, out-of-hours ruling from the supreme court of New South Wales that would force the renewal of its insurance cover – but was unsuccessful.
That set a chain reaction in motion. Sources close to Credit Suisse confirmed to GTR that the non-renewal of that insurance cover was a significant factor in its decision to freeze its SCF funds, and that loss of financing proved the trigger for the company’s collapse.
But court documents seen by GTR reveal the way cover provided by BCC – whose parent company is insurance giant Tokio Marine Management – unravelled over the previous eight months.
The policies themselves covered non-payment by Greensill clients and account debtors, applied to “some 40 clients” and totalled around US$4.6bn. They did not provide for automatic renewal.
The court decision focuses on communications between Greensill and its insurers between July and September 2020.
In July, a representative of Tokio wrote to Greensill’s insurance broker expressing doubt that the policies would be extended or that new limits would be granted.
The insurer believed that a single BCC employee, Greg Brereton, had approved cover in excess of his authority. He was fired from the company, amid internal investigations into the validity of the Greensill policies he was involved in.
Later the same month, Tokio informed Marsh that “given the current situation… we will not be able to bind any new policies, take on any additional risk nor extend or renew any [Greensill] policy past what had previously been agreed”.
On September 1, Tokio wrote to Greensill confirming that BCC “does not wish to renew” its cover for Greensill transactions, and that policies would expire the following March.
Greensill disputed in its submission that the September letter amounted to 180 days’ notice of non-renewal, as required, but that argument was rejected by the court. It also sought to emphasise the “catastrophic” consequences should cover not be renewed.
“If the policies are not renewed, Greensill Bank will be unable to provide further funding for working capital of Greensill’s clients,” the company said in its submission. “In the absence of that funding, some of Greensill’s clients are likely to become insolvent, defaulting on their existing facilities.
“That, in turn, may trigger further adverse consequences on third parties, including the employees of Greensill’s clients. Greensill estimates that over 50,000 jobs including over 7,000 in Australia may be at risk.”
But the court ruled that if insurers were forced to renew cover, there could also be “very serious” consequences, including being exposed to claims for which there is no reinsurance cover.
The ruling also points out that despite the insurers’ position being “made clear eight months ago”, Greensill only sought legal advice on the issue in late February – just days before the policies were due to expire.
That suggests it knew the September notice was valid “and therefore… understood that their policies would expire on March 1, 2021”.
Insurance cover had already been identified as a risk to Greensill’s business by German ratings agency Scope in September last year, when it downgraded the company from A- to BBB+.
The agency said it believed “rising insurance cost… will have a negative impact on profitability”, and that loss of insurance cover would be a driver for further negative rating changes.
Future receivables: the “rogue outlier”
Though Greensill’s collapse was triggered by the loss of insurance cover and subsequent freeze on financing, its downfall is rooted in its controversial dealings with Gupta’s GFG Alliance, and in particular a funding model built around anticipated future invoices that had not yet been issued.
GFG admitted in February it had become “particularly reliant” on Greensill’s future accounts receivable finance programme, whereby the lender “provided funding to GFG against expected future invoices”, according to court documentation from Greensill’s administration hearing in London.
Details around such programmes remain scarce, but 2019-20 accounts unearthed by the Australian Financial Review show that Liberty Primary Metals Australia – which owns steel and coal operations in Australia – had a facility worth hundreds of millions of dollars based on future receivables.
Similarly, Bluestone Resources, a US coal mining company headquartered in West Virginia, also received funding from Greensill based on future receivables according to a lawsuit against Greensill it has filed in a New York district court.
The filing describes in detail the receivables purchase programme (RPA) Greensill provided to Bluestone.
In a typical receivables finance programme, the financial institution involved would provide funding based on invoices that have already been issued. Bluestone, however, says its RPA programme was “based predominantly on prospective receivables”.
Rather than being underpinned by real invoices, the receivables had “not yet been generated by Bluestone” but were expected to be produced in the future. It says future and current receivables were subject to the same definition in RPA documentation.
Astonishingly, Bluestone says the list of future receivables approved by Greensill was not limited to existing customers, but applied to “other entities that were not and might not ever become customers of Bluestone”.
“This list of account debtors was created by [Greensill] by providing Bluestone with a list of potential buyers,” it says.
The company would then identify firms it believed “could potentially be buyers of Bluestone’s met [metallurgical] coal in the future”, and Greensill would determine the value and maturity date of each receivables purchase.
In effect, the lawsuit says, Greensill was providing financing “not on the existence and collectability of Bluestone’s then-existing receivables, but rather based on Bluestone’s long-term business prospects”.
In total, Greensill advanced US$850mn to Bluestone, the company says, though US$127mn went straight back into Greensill’s accounts in the form of fees and initial discounts.
The revelations have sent shockwaves through the supply chain finance market.
Future receivables as a means of financing is not unheard of, with the practice featuring in guidance from the Global Supply Chain Finance Forum (GSCFF), an industry association comprising several influential trade finance bodies including the International Chamber of Commerce.
The forum says that if the relevant receivables exist when a loan is made, that loan can be considered a secured form of finance. Where lending is provided against the “expectation of such receivables arising at a future date, the loan is akin to working capital finance” instead.
If financing does not contribute “to the operation and integration of supply chain activity… it may be viewed as a type of corporate lending” rather than SCF, the guidance explains.
It appears Greensill was not treating its future receivables programme as corporate debt, but rather classifying it as part of its wider SCF operations.
That practice caught the eye of German financial regulator BaFin, which announced in early March it had carried out a “special forensic audit” of operations at the company’s Bremen-based bank.
The regulator found Greensill Bank “was unable to provide evidence of the existence of receivables in its balance sheet that it had purchased from the
GFG Alliance Group”. It placed a moratorium on the German bank entity and filed a criminal complaint with prosecutors in Bremen.
In response, Greensill stated that from late 2020, the regulator “advised that they did not agree with the way the assets were classified by Greensill Bank and directed that they be changed”. Greensill says it “immediately complied” with this request and reclassified those assets.
“No traditional factors that I know finance against a client’s future receivables,” says Peter Mulroy, secretary general of factoring and receivables finance association FCI, speaking to GTR.
“It’s normal in many economies that the factor will take a lien against current and future accounts.
“However, the financing of future receivables that don’t exist yet? That is getting well outside of the mainstream. If you have a situation where you’re financing air and calling it a receivable, then you have to ask yourself what is the legitimacy of that transaction.”
Another senior industry figure who requested to remain anonymous describes Greensill’s loans to GFG as a “rogue outlier case” and “certainly not the industry norm”.
An additional source, also with decades of experience at major financial institutions, points out that future receivables as a concept originates in the project or structured finance space, rather than in supply chain finance.
“If you try and dress up a future receivables deal as a supply chain finance transaction then basic questions will be asked and that simply won’t get past a bank’s risk committees, if it gets there at all,” they say.
When it first emerged Greensill was in crisis, there were concerns the wider SCF market – already the subject of attention from ratings agencies, standards bodies and regulators – could suffer a contagion effect.
But so far, as of press time, SCF providers report that access to funding remains resilient and there has been no sign trade credit insurance to such programmes will be withdrawn. That is attributed in no small part to the outlier nature of Greensill’s future receivables product and the lender’s over-exposure to GFG Alliance companies.
The GSCFF issued a statement in mid-March saying it is “aware of recent concerns raised about the supply chain finance market”, but added: “The vast majority of funding is provided by banks and the market remains resilient ensuring deep and continuing liquidity.”
The forum adds that it believes the market “will remain fundamentally sound”
and urges regulators and standards bodies to “take note of the consistent behaviour of the instruments and structures that follow GSCFF market practices”.
Tod Burwell, president and chief executive of the Bankers’ Association for Finance and Trade (Baft), tells GTR:
“The industry has provided guidance and sound market practices for payables finance and receivables discounting structures, which, when followed, have proven to be important and resilient forms of financing.
“From what we have seen thus far, it appears there were characteristics here that fell outside of that industry guidance.”
Insurance cover is also expected to remain solid, according to a statement by the International Trade and Forfaiting Association (ITFA).
“Payables finance will continue to be a sustainable form of financing trade supporting corporates across their supply chains, and insurance will continue to be a critical tool in supporting such transactions,” it says.
According to FCI’s Mulroy, one lesson to be learned from Greensill’s collapse is around the potential frailty of that funding model, where investors may have taken undue comfort from the insurance cover applied to its packages of future receivables.
“Unlike a loan, where all you are questioning is the viability of the borrower, [trade receivables] have a lot of conditions for their performance,” he says.
“As soon as you create a third-party synthetic fund that has an arm’s-length approach to that asset, there is a risk you are not on top of its performance, monitoring its behaviour and examining the credit risk of the debtor or the performance of the seller.”
At the time of writing, it is not yet clear who will bear the bulk of the losses from Greensill’s collapse, though Gupta’s GFG Alliance and Credit Suisse are both taking a hit.
GFG Alliance, which obtained the majority of its funding from Greensill products, appealed to the UK government in late March for a £170mn emergency bridge loan but was rejected.
Gupta is reportedly planning to raise new loans against non-UK GFG Alliance entities, although GTR understands from industry insiders that Gupta-affiliated companies are struggling to find new funders for their previous SCF programmes.
Credit Suisse chief executive Thomas Gottstein admitted at an industry event on March 16 that “it is possible Credit Suisse will incur a charge in respect of these matters”, and though initial redemption payments of US$3.1bn have been made the bank is reportedly braced for losses of around US$3bn.