(Bloomberg Opinion) -- “My objective, frankly, is to make everything I do subject to sunlight.” That’s what Lex Greensill told me on a sunny London summer evening back in 2019. It had been a typically busy day for the supply-chain finance tycoon: A morning in Germany, where his finance company owns a bank, then back to Britain for a Mansion House event with the then Prime Minister Theresa May.
We were in a car on our way to Farnborough Airport, where a jet stood by to whisk him to a Tokyo appointment with Masayoshi Son. The SoftBank Vision Fund had just invested in Greensill’s eponymous firm, making him a billionaire on paper. From there he traveled to Australia, where Greensill grew up on his family’s watermelon and sweet-potato farm.
If the affable Greensill was irritated by me querying his opaque business and financial relationships, he didn’t let on. Maybe he was in a good mood: That week GAM Holding AG, a Swiss asset manager, finished offloading the last of a troublesome portfolio of illiquid assets that ousted fund manager Tim Haywood had sourced via Greensill Capital.
I wasn’t alone in having misgivings about the Greensill model, which involved buying invoices from companies and bundling them together into bond-like securities. After the firm’s sudden implosion this week, you’d have to ask why the blue-chip banks and Greensill’s investors, including SoftBank, weren’t equally wary.
While Greensill isn’t big enough to pose broader dangers to the financial system, it’s disturbing that yield-starved investors are still misjudging the risks of such exotic investment products more than a decade after the banking crisis. The finance industry never seems to learn.
“The sunlight that gives you the ability to ask me those hard questions is actually the same sunlight that means institutional investors have the confidence to participate in the [supply-chain finance] asset class,” Greensill said to me in 2019. It turns out that things were much cloudier than his words implied and that confidence was misplaced.
In the end it was a growing lack of faith among credit insurers, coupled with worries about the absence of light around Greensill’s dealings with steel magnate Sanjeev Gupta, that prompted his firm’s unraveling this week. Credit Suisse and GAM froze the supply-chain finance funds for which Greensill sourced assets. The Swiss bank had serious doubts about the value of some of those assets. Such sentiments are hard to survive.
Germany’s financial watchdog BaFin, on the ball for once after its dismal Wirecard failings, shuttered Greensill Bank — the firm’s associated German lender — and lodged a criminal complaint alleging accounting irregularities (the company denies wrongdoing). Greensill is preparing to file for insolvency while desperately trying to sell what’s left of the business.
Though well-connected and fond of private jets — his firm acquired a fourth plane after SoftBank invested — Greensill lives in a sleepy village near Chester in England, a world away from London’s financial and political center. Even if he’s able to salvage some value from the wreckage, it probably won’t be much.
A swift unravelling is not uncommon in situations like this — client trust is fragile and capital is footloose — yet Greensill’s demise is breathtaking. The company failed to address the vulnerability caused by its credit-insurance dependency until too late.
Credit insurance was a key attraction for investors who parked money in the Credit Suisse funds. It meant they earned a decent yield while seemingly taking little risk. But fund investors failed to consider what might happen if Greensill was ever unable to renew the insurance backstop. Once insurers withdrew policies underpinning these assets, after a spate of Greensill customer defaults, they became hard to value and the funds were gated.
Greensill has overcome setbacks before that might have sunk less forceful personalities. “Like him or loathe him … he’s a force of nature,” is how one London financier describes him. But he looks defeated this time.
After spending his early career as a banker with Morgan Stanley and Citigroup Inc. until 2011, he had a rough start as an entrepreneur. Greensill Capital made hefty losses at first on various supply-chain finance deals. But gradually his idea for creating an asset class out of bundled up corporate invoices started to attract followers.
Financial investors flocked to him: First General Atlantic, whose $250 million investment in 2018 valued his firm at $1.6 billion, and then SoftBank, which injected $1.5 billion at a $4 billion valuation the following year. Greensill’s charisma, and the potential $55 trillion addressable market for working-capital finance that he described, must have appealed to Son. SoftBank’s due diligence and its skill at picking financial-sector winners now look rather questionable.
The core of Greensill’s business model — buying invoices from companies, packaging them into bond-like securities and marketing them to institutional investors — was quite innovative. Previously it was mostly large banks who offered invoice financing. The supply-chain funds that Greensill created with Credit Suisse and GAM opened the door to institutional investors. Greensill claimed to purchase several hundred million dollars of company invoices daily.
Despite his stated wish for sunny transparency, his firm always remained something of an enigma. Greensill benefited from a lack of accounting transparency among the corporate clients with which it struck invoice-financing deals. Companies often don’t disclose these arrangements clearly in their financial statements.
Firms like Greensill pay suppliers the value of their outstanding invoices minus a discount, and then seek payment at a later date from the companies who received the goods or services (see the example below). Suppliers are happy because they get their invoices paid quickly and the buyers of the goods or services are pleased because their payments are deferred, which helps cash flows.
As well as making money from setting up this financing, the business also gave Greensill a ready flow of invoices to package together and supply to the Credit Suisse and GAM funds.
But credit-rating agencies worried about companies’ use of supply-chain finance, which they deem a form of short-term debt that lacks transparency. Though not a Greensill client, the collapse in 2018 of U.K. contractor Carillion, a prolific user of supply-chain finance, prompted greater scrutiny of this financing from the agencies.
The ratings companies warned, too, about businesses getting into financial difficulties if these debt-like facilities were withdrawn suddenly. They may be proven right. When petitioning a court in Australia this week to instruct credit insurers to continue covering $4.6 billion of Greensill-sourced supply-chain assets, the firm’s lawyers warned that otherwise some of Greensill’s clients were likely to become insolvent, putting thousands of jobs at risk.
A banker at a rival firm insists supply-chain finance can be a good solution “when done properly” and hopes Greensill’s demise “doesn’t alter people’s perception too much.” It might, though. At the very least one should expect the accounting authorities and other regulators to pay more attention to this stuff in future.
That does appear to be happening. Thanks to diligent news reporting, it’s becoming clear how important Greensill was in financing Gupta’s steel empire, GFG Alliance. Using the payment flows from steel, aluminum and power plants, he helped Gupta acquire various metals assets. Greensill received extensive legal advice on how to classify these assets and has at all times been transparent with its regulators and auditors about that approach, the firm says. Without Greensill’s financial backing, however, Gupta’s empire building is under pressure.
BaFin, which says it found irregularities in how the lender booked assets tied to Gupta, is eager to prove it’s not a pushover having dropped the ball spectacularly on Wirecard.
Greensill was certainly aware of his responsibility to regulators, depositors and the public. “Every year I have to re-sign a personal guarantee to the German deposit protection authority for any losses they may sustain with respect to the deposits [of Greensill Bank],” he told me before boarding the jet to Japan in 2019. “It’s an annual reminder of the fact that my family home is on the line if we decide to be foolish.”
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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