Industry insiders are hopeful that access to funding and insurance will remain resilient across the wider supply chain finance (SCF) market, despite the disastrous collapse of London-based behemoth Greensill.
Though Greensill’s demise is rooted in its exposure to GFG Alliance, a network of companies linked to metals magnate Sanjeev Gupta, its collapse last week was triggered by the loss of insurance cover for high-yield investment products and a subsequent freeze on funding from Credit Suisse.
There had been hopes that despite Greensill filing for administration in a London court on Monday, private equity investors would be able to salvage the company’s SCF business, which sources describe as robust and insulated from the company’s GFG-related activities.
But as of press time, serious doubts are arising over that proposed acquisition, opening up the possibility that other SCF providers and funders could be called upon to step into the gap left by Greensill’s collapse.
That has prompted efforts from industry groups to reassure funders and insurers over the safety of SCF as a product.
The Global Supply Chain Finance Forum (GSCFF), an industry association comprising several influential trade finance bodies including the International Chamber of Commerce, says it is “aware of recent concerns raised about the supply chain finance market”.
However, it says: “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: “As with any disruption, I’m sure there will be closer inspection of the structure and nature of existing deals outstanding and new deals contemplated going forward, as is prudent.
“However, 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 & 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.
Risky assets
Industry sources have been keen to draw a distinction between Greensill’s SCF business – which facilitated early payment to suppliers to investment-grade corporates such as Vodafone and Rio Tinto – and its high-yield products tied to GFG Alliance companies.
GTR has spoken to four sources familiar with Greensill’s SCF activities, all of whom say that part of the business was strong. Its SCF programmes are “robust, with default rates well within industry averages”, a banking industry source says, while one funding participant says it never once experienced non-payment.
However, Greensill did not grow to become an international financing heavyweight – at one point touting a potential valuation of US$7bn ahead of a potential initial public offering – solely through selling notes tied to low-risk SCF programmes.
“Greensill did not get into trouble because of SCF, but entirely because of its push into high-yield, deeply distressed credit,” an industry source argues. “Nothing to do with SCF.”
After Credit Suisse froze funds that were providing more than US$10bn to Greensill, suggestions emerged that the company had been selling notes containing lower-quality but higher-yield debts as investment products, with the underlying risk covered by trade credit insurance.
“This is where the subprime mortgage crisis analogy comes in,” one source suggests. “By adding credit risk insurance, they were trying to give a better yield on a sub-investment grade product.”
Steven van der Hooft, founder and chief executive of SCF consultancy Capital Chains, says he does not expect financial institutions to withdraw funding in situations where they have a direct relationship with a corporate or its suppliers.
“But where you have an investor that doesn’t have a relationship with the corporate, and is investing in a fund run by – in this case – Greensill, they are quite detached from the physical trade,” he tells GTR.
“They’re just looking for yield. Those kinds of investors are more likely to pull their funding lines, afraid they might be investing in a similar scheme.”
For GFG Alliance, its loss of financing is a major concern and follows warnings from Greensill that a sudden withdrawal of finance to its clients could cause defaults and result in tens of thousands of job losses.
Gupta told union representatives on Tuesday that the group is mostly “operationally strong”, but that “there are some exceptions and I’m sorry to say that includes some of our UK steel businesses”.
The UK’s National Trade Union Steel Coordinating Committee issued a statement the same day saying it had held talks with Gupta over the future of Liberty Steel, which owns 12 plants in the UK.
Gupta told representatives he “intends to secure a refinancing of the debt to provide the business with the necessary liquidity going forward”, the committee says.
Insurance controversy
The insurance crisis that triggered Greensill’s collapse has been laid bare by court documents filed in Australia, seen by GTR.
Greensill’s trade credit insurance had been provided by The Bond & Credit Company (BCC), an Australian insurer that was acquired by Tokio Marine Management in 2019.
During mid-2020, concerns arose within BCC about its policies covering Greensill transactions, which totalled US$4.6bn across around 40 clients.
Toby Guy, a director at the firm, wrote to Greensill in August saying he had become aware a colleague had sought to bind BCC to policies “where the customer limit sought was in excess of [the colleague’s] delegated authority”.
That colleague, named as Greg Brereton, was BCC’s head of trade credit until July last year. He did not respond to a request for comment when contacted by GTR.
According to the letter, an investigation was launched into policies administered by Brereton after June 2019. The probe was later expanded to earlier activities.
Marsh – Greensill’s insurance broker – told BCC it considered the investigation an internal matter for the firm, and welcomed its “strong commitment to support Greensill Capital as your largest customer”.
But parent company Tokio repeatedly told Greensill it did not intend to renew that cover, and on September 1, wrote to confirm that policies would expire the following March.
Greensill was unable to arrange alternative cover in the interim, and failed to secure a last-ditch, out-of-hours ruling from an Australian supreme court that would have forced renewal.
Industry sources tell GTR that due to the unique nature of the case, they do not expect wider ramifications around trade credit insurance for SCF transactions. In addition, the insurers exposed to Greensill-related defaults are reportedly protected by reinsurers themselves.
“Trade credit insurance is still available, it’s widely used, and it has been for a long time,” a trade finance industry source says. “The insurers are not withdrawing from this product area, and you could even say that what happened with Greensill shows the insurers are in good control of their risks.”
What’s next?
As of press time, the most pressing issue for those close to Greensill is whether its SCF business will be acquired.
Soon after the freeze of funds by Credit Suisse, Greensill entered into exclusive negotiations with retirement savings company Athene Holding, which is backed by Apollo Global Management, over a potential sale.
Sources close to the deal said on March 9 that an agreement appeared close, with Athene set to take over Greensill’s non-Gupta-related SCF business for around US$60mn.
However, that evening, it emerged that talks had stalled, following a breakdown in discussions involving 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 from sources close to the deal that concerns arose because suppliers using Taulia’s platform are ultimately Taulia’s clients, and not Greensill’s.
That means that even if the Greensill acquisition went ahead, transactions that used to be funded by Greensill could be funded by other institutions instead.
When contacted, a spokesperson for Taulia confirmed it has been in talks with Apollo, adding its customers want to ensure “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 add.
Even if the acquisition of Greensill’s SCF business was revived, there are still questions around whether banks and other investors would continue to provide funding through that route.
One industry source says funders “may be hesitant, and there will be some commercial due diligence on the new entity that needs to be done”.
It may help that those institutions would likely be dealing with former Greensill staff and technology that they are familiar with, but there will be questions of trust to answer, they add.
“There would be a delay while that all happens,” the source adds. “At the moment, new deals are paused and banks haven’t yet decided whether or not they will continue funding these programmes if or when Apollo takes over.”
An alternative option could be to provide SCF lines directly to buyers that were previously signed up to Greensill programmes, though Capital Chains’ van der Hooft points out that could create a “funding gap” while due diligence is carried out on suppliers.
Another area of uncertainty is the future of Greensill’s German entity, Greensill Bank AG, after financial regulator BaFin issued an “immediately enforceable” moratorium on its activities.
The FT revealed shortly afterwards that BaFin had filed a criminal complaint against Greensill Bank AG – confirmed by the regulator on Friday – alleging balance sheet manipulation. The case is being handled by the federal prosecutor’s office in Bremen.
Representatives for Greensill and Apollo Global Management have not responded to requests for comment.
