Greensill Capital, a provider of working capital finance, is on the verge of insolvency after 10 billion USD of funding from Credit Suisse was frozen on Monday 1st March. With impacts on financial markets ranging from Switzerland to Australia, Greensill offers an insight into the interconnectedness of global financial markets. With the saga being far from over, further ramifications are expected for those involved, albeit unknown and unquantifiable at present.
Greensill, founded by Lex Greensill MBE and advised by David Cameron, is a financial services company that specialises in supply chain finance, which involves the provision of loans to companies in order to pay their suppliers. Despite possessing the slogan “Making Finance Fairer,” the concept of supply chain finance has been met with controversy as some claim that it hides corporate borrowings from shareholders. Greensill itself has not been keeping these loans on its own balance sheet, instead it has repackaged them and sold them to vehicles such as Credit Suisse’s asset management funds; as of March, Credit Suisse has frozen the funds it is providing Greensill.
The freeze of funds by Credit Suisse is thought to have been a direct consequence of the expiration of insurance policies that cover Greensill’s loans. Britain’s state-owned bank, British Business Bank, informed Greensill that it will remove a taxpayer guarantee following an investigation into their compliance with the Government’s Coronavirus Large Business Interruption Loan Scheme. This leaves Greensill highly exposed to the loans it has made – particularly the hundreds of millions of pounds lent to GFG Capital, British steel magnate Sanjeev Gupta’s business. Greensill’s loans to GFG account for up to 66% of its loan book leading to reliance on GFG’s financial health. Indeed, defaults by GFG would leave Greensill with serious insolvency problems.
The primary backers of Greensill include SoftBank’s Vision Fund, with a holding of 1.5 billion USD, and Credit Suisse’s Asset Management funds. Colin Fan, who was responsible for SoftBank’s involvement, left in January 2021 after over 3 years working for the fund, potentially as a result of this crisis. SoftBank has also already substantially written down its holdings and aims to reduce it further, possibly to zero, in the near future. Credit Suisse has lent 160 million USD, in addition to its 10 billion USD exposure in the packaged loans sold by Greensill. The Swiss investment bank was reportedly looking for a way to decrease this exposure with Greensill several months ago, according to Bloomberg. Since Greensill relies so heavily on SoftBank and Credit Suisse, this withdrawal of funding and accompanying freezing of funds has led to Greensill to the verge of bankruptcy.
In response Greensill has already sought ‘Safe Harbour’ protection in Australia, a process which provides immunity to any financial institution that makes a voluntary disclosure of any possible violation to a government agency (although the specific violation has not yet been made public). Simultaneously, it is conducting negotiations with Apollo Global Management, a global alternative investment manager, over a potential deal to cherry pick some of Greensill’s best assets, amounting to approximately 100 million USD. With one insider suggesting Apollo-backed companies could provide as much as 10 billion USD to acquire supply chain finance assets from Greensill while another banker involved stated Apollo is not the front runner, the extent of Apollo’s involvement is currently unclear.
This mini financial crisis comes less than a year into Thomas Gottstein’s tenure as CEO at Credit Suisse, just months after he asserted his wish for the bank to start on a ‘clean slate’ in 2021 and lead the bank ‘into a growth phase.’ Perhaps more worryingly however, this is the second time in three years that loans associated with Greensill have caused turbulence in the Swiss banking industry after investment manager GAM had to liquidate one of its funds having invested in bonds organised by Greensill for Sanjeev Gupta.
Ultimately, the decision by the British state backed bank has created a rippling effect on a number of players in the financial markets, ranging from a London based Fintech company (Greensill) to a British steel magnate and a multinational investment bank. As of Wednesday 3rd March, the story is far from concluded, with Greensill entering an exclusivity agreement with Apollo and German regulators poised to intervene in the insolvency negotiations. Following updates on Greensill and its stakeholders will be important over the coming weeks as the longer term implications are yet to be realised. The story does, however, demonstrate the interconnectedness of a globalised financial system and its sensitivity to change.
By Andrew Hopkins
Sector Head: James Float