Funds that invest in supply chain finance (SCF) programmes “face an uncertain future” after the collapse of Greensill, with investor confidence expected to take a hit, a new paper by Fitch Ratings argues.

Greensill collapsed into insolvency in March after a group of investment funds it was relying on were abruptly suspended, as serious concerns emerged over weaknesses in the underlying programmes.

Four of those funds, managed by Credit Suisse, had provided around US$10bn in support to the London-headquartered lender, while another from GAM Investments was worth around US$700mn.

Fitch Ratings says the suspension and liquidation of those funds – along with industry concerns over the application of credit insurance and the use by Greensill of controversial future receivables programmes – could result in spillover effects to the wider market. Credit Suisse has partially repaid investors but admits it expects to incur a charge as a result of Greensill’s collapse.

“Fallout from the situation is likely to damage investor confidence in SCFs [supply chain finance funds] and may trigger additional regulatory scrutiny,” it says.

One potential response by investors and regulators will be to pay closer attention to the “processes and techniques used by sellers of receivables – particularly future receivables”, Fitch suggests.

In Greensill’s case, it has emerged that financing was provided to borrowers on the basis of hypothetical future invoices, in some cases originating from customers that did not yet exist.

The practice appears to have been widely used by GFG Alliance, a network of companies linked to metals tycoon Sanjeev Gupta, and has been described in detail in a lawsuit filed by US mining company Bluestone Resources.

The revelations have sent shockwaves through the SCF market, with experts describing the practice as a rogue outlier and well outside industry norms.

“Arguably, future receivables transactions fall outside of the scope of traditional trade finance and therefore exposure to such instruments in funds may indicate high risk appetite,” Fitch says.

“Particularly as such arrangements can be limited in transparency, weaker companies may use these techniques in an effort to offset fundamental challenges facing the business.”

It warns that without “material changes to SCF [funds] to address the risks highlighted by recent events, Fitch believes future growth in such funds will be limited”.

Another concern raised by the ratings agency is around funds that rely on credit insurance as a safety net, in effect boosting the creditworthiness of the underlying portfolio.

That creates the risk of “a rapid and material negative change in a [fund’s] risk profile” if insurance cover is terminated, the paper says, particularly where the portfolio has exposure to lower quality or unrated companies.

In Greensill’s case, the suspension of the Credit Suisse and GAM funds was triggered by a sudden loss of insurance cover worth billions of dollars at the end of February.

Australian insurer Bond & Credit Company (BCC) had refused to renew Greensill’s cover, and attempts to arrange alternative policies were unsuccessful.

“Fitch typically will not rate transactions that are significantly dependent on credit insurance,” the paper says.

Other risks include funds that are reliant on a small number of counterparties or platforms, suggesting that the “multiple layers” of relationships between Greensill and the Credit Suisse funds “indicate excess reliance” on the company.

Regulatory attention, meanwhile, is likely to be focused on liquidity management practices and fund cross-holding, where suspension of one fund could affect other funds along the chain, the paper suggests.


Back to basics

Following Greensill’s collapse, industry experts have emphasised that Greensill’s operations – such as its future receivables product and its risk appetite when lending to GFG Alliance companies – should not be seen as representative of the wider SCF or trade finance market.

However, they say the crisis has shown the importance of investors having proper oversight of the assets they are investing in.

Peter Mulroy, secretary general of factoring and receivables finance association FCI, says that when a fund contains a mixture of loans and receivables it can be difficult to understand some of the underlying structures.

“If you’re entering into these third-party arrangements you have to be cognisant of the risks,” he tells GTR. “You have to ask whether you have the proper risk controls when you enter into an arm’s-length approach to funding, because loss of control can be a major issue.”

Tod Burwell, president and chief executive of the Bankers’ Association for Finance and Trade (Baft), says that over the past five years the banking sector has set standards and principles that should help understanding of SCF as a product while safeguarding against outlier practices.

“When the autopsy of Greensill is completed, you’ll find evidence of many transactions and practices that were well outside of those guidelines,” he tells GTR.

“Creative structures enable deals that might otherwise not get done, but of course carry greater risk.  When packaged into funds, an additional layer of complexity and risk is added. That doesn’t mean supply chain finance itself is risky, or that insurance is inappropriate for these transactions, or that accounting treatment needs to be changed.

“Rather, it means investors need proper transparency to understand what they are buying, and oversight should be tailored to fit those nuances.”

Burwell suggests that a “back to basics approach” should help determine how to stop a recurrence of the Greensill scandal, supported by stronger disclosure around the “more esoteric structures” in the SCF market.

Sean Edwards, chairman of the International Trade and Forfaiting Association (ITFA), adds that placing SCF assets into funds “adds another level that needs to be understood”, especially when credit insurance is used.

“Transparency and understanding are key as they ever were,” he tells GTR.