The future receivables product at the heart of Greensill’s controversial dealings with GFG Alliance is highly unusual and beyond the risk appetite of the wider trade and supply chain finance industry, insiders say.

Greensill’s sudden collapse in early March was triggered when billions of dollars of insurance cover expired overnight, prompting Credit Suisse to suspend investment funds relied upon by the London-headquartered financial institution. GTR has since found the company started contingency planning for insolvency as early as last year.

It has emerged that Greensill’s widely publicised exposure to GFG Alliance companies – a loose network of businesses with ties to metals magnate Sanjeev Gupta – was rooted in financing it made available based on anticipated invoices that had not yet been issued.

GFG admitted in February it had become “particularly reliant on GCUK’s [Greensill] ‘future accounts receivable finance’ programme, whereby GCUK 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 AFR 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 the Wall Street Journal. Bluestone has since filed a lawsuit against Greensill in a New York district court.

The revelations have caused concern in the trade and supply chain finance market.

“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. Companies do at times grant permission to provide a kind of seasonal over-advance.

“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”.

“Say, hypothetically, a company agrees to sell a car manufacturer US$100mn of steel over a 12-month period, and that car company issues it with a purchase order, normally that doesn’t mean anything until the steel itself is produced,” they say.

“If the steel was ready for shipment it would be a different kettle of fish, because the company could submit the shipping documents against the purchase order and obtain finance on that basis.

“But it’s a problem if financing is being provided against that initial car company’s purchase order, without the steel having been produced yet – and more so, if the purchase order itself doesn’t exist yet but is anticipated in the future. That is certainly not the industry norm.”

Another 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.


Funding questions

In Greensill’s case, the inherent risk around future receivables was partially offset by billions of dollars of trade credit insurance, provided by Australian underwriter Bond and Credit Company (BCC).

However, court documents show that BCC informed Greensill in August that it did not intend to renew those policies once they expired at the start of March 2021.

The insurer – which by then had been acquired by Tokio Marine – said it believed a single employee, Greg Brereton, had approved cover in excess of his authority. He was fired from the company, with internal investigations ongoing as to the validity of the Greensill policies he was involved in.

Greensill was unable to obtain further cover, and Credit Suisse froze two investment funds that had been channelling cash into Greensill financing programmes.

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.”

Credit Suisse chief executive Thomas Gottstein said at the annual Morgan Stanley European Financials Conference on March 16 that the bank is continuing to prioritise efforts to recover investors’ funds, with the help of administrators Grant Thornton.

Gottstein said initial redemption payments of US$3.1bn had already been made, while US$50mn of a US$140mn bridge loan made to Greensill last year has also been repaid.

“While these issues are still at an early stage, we would note that it is possible that Credit Suisse will incur a charge in respect of these matters,” he said.

Greensill filed for administration in the UK on March 8. Despite initial hopes its non-GFG Alliance-related SCF business – understood to be low-yield but robust – could be sold to private equity investors, that deal has since collapsed.

Greensill had been involved in funding suppliers on Taulia’s SCF platform, but it emerged that those opportunities were likely to be taken over by other funding partners, meaning Greensill’s assets were worth less than initially thought.

GFG declined to comment when contacted, but an internal note from Gupta to its senior leadership team seen by GTR says it has “significantly improved the efficiency of our major businesses and most of our operations are generating positive cashflows”.

The group has appointed a “specialist team of advisors… to support our refinancing efforts and negotiations with Greensill’s administrators”, the note adds.

“On refinancing, we are enthused by the amount of offers that we have received that reflects the strength of our business. However, given the scale of our operations this process will take some time to organise.”

Greensill declined to comment when contacted by GTR.