Greensill Capital, the supply chain financing firm, recently filed for administration, citing “severe financial distress” which meant the company could not repay a 140 million USD loan from Credit Suisse. Greensill’s own lawyers have warned that as a result of the collapse many of the firm’s corporate clients could also become insolvent, which risks over 50,000 jobs globally.
Historically, the firm was a major player in the supply chain finance industry (Figure 1), claiming in 2019 to have paid 143 billion USD to more than 10 million customers. The firm’s clients, originating from over 175 countries, ask the supplier’s invoice to be paid immediately, but at a discount, by the outside financier (e.g. Greensill). The financier then claims an increased amount from the buyer at a later date, enabling both the supplier and buyer to have access to short term capital which can be used to ease cash flow issues. The problems begin if the buyers are unable to repay the financier.
Figure 1: Graphic showing the process of Supply Chain Financing. Financial Times
Lex Greensill, the Australian founder of Greensill Capital, revolutionised the industry by packaging the debts held by the firm into investment funds, predominantly via the investment bank Credit Suisse. This was done in a similar fashion to the way subprime mortgages were packaged into securities in the years preceding the 2008 financial crisis. Despite liabilities exceeding assets in 2016, Greensill’s innovative business model convinced private equity group General Atlantic to invest 250 million USD of fresh capital. In 2017 the fund manager GAM followed suit, investing a further 120 million USD.
As a result of these investments, Greensill’s revenues increased to 102 million USD and propelled the firm to a profit in 2017. This caught the attention of SoftBank’s massive 100 billion USD Vision Fund with the technology focused fund making an investment of 1.5 billion USD in 2019. Greensill’s investors required the firm to take out insurance to cover the debts in the event of a default. However, unlike the subprime mortgage lenders, Greensill was still exposed to losses incurred under any uninsured sections of the fund.
Greesill’s insurer, BCC Trade Credit, recently refused to renew a critical 4.6 billion USD contract, a move which then forced Credit Suisse to freeze 10 billion USD in funds related to the firm in order to protect investors. It was also revealed that Greensill had around 5 billion USD of exposure to Sanjeev Gupta’s company GFG Alliance, a company also experiencing financial difficulties which meant that they started to default on several obligations to repay Greensill.
A last 59.6 million USD offer from the US private equity group, Apollo, which promised to save at least some of Greensill has also collapsed. Apollo were only interested in Greensill’s IT systems and intellectual property (and were therefore unlikely to take on any financing), but this would have been enough to save the firm’s 500 employees.
For now, the fate of Greensill capital seems certain. Lex Greensill’s journey from humble beginnings in Australia has come to end, with the firm’s collapse threatening to have knock on effects for smaller businesses reliant on Greensill’s financing across the world.
By Taylor Alexander
Sector Head: Daniel Aliwell