The Fast Demise of a Debt-Driven Company
Greensill Capital promised a win-win scenario for both buyers and sellers before it all fell apart, raising questions about the firm’s accounting practices.
The courthouse should have been shut down for the day by now.
Greensill Capital’s lawyers argued before a judge in Sydney, Australia, at a hearing that started at 5 p.m. on March 1 that the firm’s insurers should be required to renew policies that were due to expire at midnight. Greensill Capital required the insurance to cover $4.6 billion in debt it owed to companies around the world, and they believed that without it, 50,000 jobs would be jeopardized.
The judge ruled no, arguing that the corporation had taken far too long to bring the case to court. Greensill Capital, which was listed at $3.5 billion less than two years ago, filed for bankruptcy in London a week later. An multinational company with 16 offices worldwide, from Singapore to London to Bogotá, was declared bankrupt.
Greensill’s catastrophic loss is one of the most spectacular financial company failures in over a decade. It has entangled SoftBank and Credit Suisse, and it poses a challenge to British steel magnate Sanjeev Gupta’s global business empire, which employs 35,000 people. The governor of West Virginia and his coal mining firm have sued Greensill Capital for “a persistent and lucrative fraud” involving $850 million in loans.
Lex Greensill, an Australian farmer-turned-banker, is at the core of it all. He formed his company in London in 2011 as a solution to a problem: Companies want to pay for their supplies as soon as possible, while the companies who make the supplies need their money as soon as possible.
It was personal to Mr. Greensill, 44. He remembered seeing his parents, who owned a sugar cane and melon farm, suffer financially due to long delays in obtaining payment for their produce. He was troubled by the fact that banks would only lend to big corporations and their manufacturers, leaving small and midsize businesses in the lurch.
Mr. Greensill said in October 2011 at Manchester Business School, his alma mater, that it was “the thing that annoyed me to extremes.”
Mr. Greensill placed his company as a middleman who would pay buyers quicker — minus a small fee for the expedited payment — and then give the buyer time to repay the middleman.
Supply chain financing is a form of business lending that has been around for a long time.
Mr. Greensill, on the other hand, added a new degree of difficulty. He took the supplier invoices, converted them into short-term assets, and placed them into funds that investors might purchase, similar to money market funds. The funds were sold by Credit Suisse, a major Swiss bank, and GAM, a Swiss asset management company. The money raised from investors was used to repay suppliers.
Greensill was able to turn a mundane finance practice into a highly profitable one in part because it was able to shuffle risk around, transferring some of it to insurance firms and other financial institutions. It harkens back to the asset-backed securitization that fueled the 2008 financial crisis.
Mr. Greensill accumulated well-connected friends — and private jets — as his business expanded. In 2012, he supported Prime Minister David Cameron’s government in developing a supply chain financing program. He said he did the same for US President Barack Obama, according to The Australian newspaper.
Mr. Cameron will eventually join Greensill’s team as an adviser. Former Australian Foreign Minister Julie Bishop has also joined the organization as an advisor.
SoftBank’s Vision Fund, a $100 billion investment vehicle designed to make large bets on emerging technology firms, invested $1.5 billion in Greensill Capital in 2019. Mr. Greensill told Bloomberg TV on the day the first of two SoftBank investments was revealed that his company will have “many opportunities” to partner with SoftBank and the other companies in their portfolio.
Mr. Greensill had amassed a fortune of $1 billion.
There are issues that arise.
Supply chain financing, which is marketed as a “win-win” for consumers and vendors, can mask issues on a company’s balance sheet. Money owed to a middleman, such as Greensill Capital or a bank, acts as a “deal payable” or “accounts payable” — money owed to a supplier — rather than as debt. If it is not disclosed, it may be a secret method of borrowing — and there is no accounting requirement that requires it to be disclosed.
According to S. Alex Yang, an associate professor at the London Business School, supply chain finance “exists for a cause.” “However, several large corporations are still exploiting it.”
The issue contributed to the failures of British construction giant Carillion in 2018 and Spanish renewable energy firm Abengoa, which filed for bankruptcy in February. When Abengoa’s enormous debt burden — billions of euros — was exposed in 2015, the firm narrowly avoided bankruptcy.
Regulators, auditors, and rating agencies are worried about a lack of accountability that can make a company’s balance sheet appear better than it really is. After finding a $1.1 billion rise in account payables, the Securities and Exchange Commission requested Coca-Cola to include more information on whether it was using supply chain financing.
The laws in the United States could be tightened as a result of accounting firms’ pleas. The Financial Accounting Standards Board of the United States reported in October that it would begin establishing stricter disclosure guidelines, but an international accounting board agreed not to follow suit two months later.
Greensill Capital started to show signs of trouble in 2018, the year before SoftBank made its large investment.
GAM, a Swiss asset manager, shocked the London financial world by suspending Tim Haywood, one of its top fund managers. After an internal investigation raised concerns about investments he made in companies linked to Mr. Gupta, who was quickly becoming a steel and metals tycoon, he was fired for “gross misconduct,” Bloomberg announced. Mr. Greensill, according to Bloomberg, was the deal’s middleman.
Mr. Greensill’s debt funds drew unusual attention from SoftBank the following year. According to people familiar with the deals, a separate arm of SoftBank pumped hundreds of millions into the Credit Suisse funds while the Vision Fund was investing in Greensill. SoftBank found itself in a difficult situation as a result of this arrangement: Greensill’s largest shareholder was one subsidiary, and another was a lender to Greensill through Credit Suisse funds.
In Germany, where Greensill had purchased a retail bank, other red flags emerged. Greensill Bank was found to be excessively open to Mr. Gupta’s companies in a 2019 audit. BaFin, Germany’s banking regulator, was fascinated by this. BaFin announced earlier this month that it had found evidence that assets linked to Mr. Gupta listed on the bank’s balance sheet did not exist.
The repercussions of a collapse
Despite the appearance of red flags, British officials held Greensill in high regard. It was appointed as an approved lender for special state-backed loans to help companies cope with the pandemic in June.
Mr. Greensill has made a free version of one of his company’s applications accessible to certain National Health Service employees, enabling them to be paid faster and more regularly than they would otherwise.
The insurance was, in the end, the determining factor.
Last July, Tokio Marine Management, the parent company of Greensill’s insurance provider, announced that two policies underwriting Greensill’s customers, the buyers in the supply chain, and covering investors in Greensill-linked funds will no longer be extended.
According to Australian court records, Greensill was unable to find any insurer willing to provide the policy. Credit Suisse, concerned about the lack of insurance, froze the Greensill assets, which were worth $10 billion at the time.
After the bankruptcy filing, there has been a lot of reckoning at Credit Suisse. It has returned $3 billion in cash to fund holders and announced that it is trying to recover additional funds. It has also admitted that a $140 million loan it made to Greensill was likely to result in losses.
The bank also announced that the head of its asset management division had been replaced, and that compensation for senior executives involved in the Greensill funds had been suspended.
Greensill’s outlook is grim now that it is bankrupt. A deal to sell a portion of the company to Apollo Global Management, an American investment firm, fell through.
Greensill did not respond to a request for comment for this post.
Greensill’s investment is likely to be wiped out in the lender’s insolvency proceedings, another high-profile setback for SoftBank after it was forced to rescue WeWork in late 2019.
A judge in Germany has approved BaFin’s request to launch insolvency proceedings against Greensill Bank.
35,000 jobs are hanging in the balance.
Greensill had applied a twist to its funding model in the United States, according to court documents: lending money based on a company’s expected future revenue, not just past transactions, thus raising risk.
On March 15, West Virginia Governor Jim Justice and his coal mining firm, Bluestone Resources, sued Greensill in federal court for fraud, claiming that Greensill tricked them into deepening their relations without revealing its financial difficulties. Greensill lent Bluestone $850 million before it went bankrupt, all of it secured by “prospective receivables,” or sales that have yet to occur.
The complaint argues that Greensill’s “unjustified abandonment of Bluestone” presents a “clear and present threat” to Bluestone.
Mr. Gupta’s string of firms, the London-based GFG Alliance, has now lost its biggest financier. The corporations’ prospects, as well as the 35,000 jobs they hire, are unclear.
Greensill’s problems have produced a tough situation, according to GFG. The businesses have “adequate capital” for current operations, but are searching for long-term financing, according to the statement. Despite relatively high steel prices, GFG has been affected by the pandemic, with some mills shut down or operating on a limited basis.
Trade unions in the United Kingdom, where Mr. Gupta’s businesses employ 5,000 people, are worried about job losses. Mr. Gupta is also regarded as a work saver by some for purchasing unwanted plants. In France, where 2,000 jobs are at risk, finance minister Bruno Le Maire said the government would be willing to intervene to avoid job losses.
Alvance Aluminium Poitou, an ailing foundry purchased by Mr. Gupta in 2019, is one of the vulnerable French plants. Greensill Bank gave the cash-strapped company an 18 million euro state-backed loan in December. However, the bank suddenly removed the funds two days later, according to Jean-Philippe Juin, a member of the Confédération Générale du Travail trade union, which represents the plant, which employs 600 workers.
Although GFG claimed to have “strong cash flows” across the board, Mr. Juin said that staff at the Poitou plant were warned last week that they could not be paid in March.
Mr. Juin said, “Mr. Gupta introduced himself to us as a savior, with optimistic words and many promises.” “In the end, he proved to be a hollow shell.”
