Greensill’s Business Model

Supply chain finance is where a financial intermediary provides the necessary financing for a buyer to pay their supplier. A buyer might be unable to meet their invoice obligations by the due date so would need an intermediary to meet their invoices on time on their behalf. Greensill’s clients are the buyers – Greensill will buy the invoices off of their clients and pay the suppliers straight away at a discount. Greensill package the invoices as securitised loans which they sell onto final institutions like Credit Suisse [1]. There is an insurance firm that usually underpins the whole operation to provide assurance. The securitised loans industry is extremely competitive with low margins. To give themselves a competitive advantage, Greensill offered longer loan repayment times to their clients [2].

What Went Wrong?

Greensill filed for administration in early March 2021 as they were unable to meet their financial liabilities, notably, they were unable to pay back their $140 million loan to Credit Suisse [3]. The lack of liquidity within Greensill was caused by their clients defaulting on their payments and Greensill’s overexposure to certain clients. Such defaults meant that Credit Suisse, who were funding Greensill’s operations, wanted to be repaid, which Greensill had no conceivable way of doing. Greensill’s portfolio had an overexposure to GFG Alliance, a metal conglomerate that defaulted on $5 billion worth of loans. Court documents showed that GFG wrote to Greensill in early February 2021 to inform them that they needed Greensill to provide them with working capital or else they would collapse into insolvency [4]. Such documentation proves that Greensill was aware that GFG were in trouble, and so having such a large amount of exposure to them would be problematic.

GFG were using the funding to finance transactions between ‘related parties’, further increasing the risk of default. Greensill then packaged the loan repayments into an investment product sold to funds at Credit Suisse. Most large financial institutions like Credit Suisse would want to avoid financing invoices between related parties as they are more prone to fraud than transactions between independent companies. There is no evidence of illegitimate transactions in the GFG case, but it still increases the risk of the legitimacy of the security and contributed to Greensill’s collapse [5].

Additionally, Greensill lost their insurance protection when their main insurer refused to renew a $4.6 billion contract and Credit Suisse froze $10 billion worth of funds linked to Greensill reducing the liquidity within the business [6]. With investors losing confidence in Greensill and Greensill’s clients not meeting their debt obligations, Greensill needed to go into administration.

The Ignored Warning Signs

A report completed by the ratings agency Moody’s argued that some types of supply chain finance make a bad situation worse because it is a risky financing tool [7]. With supply chain financing being so complex and risky, it is clear that Greensill had some oversight in their due diligence and risk management techniques. The excessive exposure to GFG Alliance has proven Greensill had ineffectively hedged out the risk.

When Greensill went for a fundraising round in July 2020, Japan-based insurer Tokio Marine said they would not extend or renew Greensill policies which set into motion this chain of events [8]. This was because confidence in Greensill’s business model fell and they weren’t able to raise the $1 billion they had intended to. Investors were deterred from investing because Greensill’s clients had begun defaulting, and Greensill could not provide substantive answers about how they would ensure the integrity of their business model after losing their insurance and overall opaqueness. Failing to raise the finances caused Greensill to become desperate, with Greensill bankers allegedly “calling absolutely everybody with any spare cash” [9].

Additionally, the Big 4 professional services companies wrote a letter to the US Financial Accounting Standards Board calling for transparency and consistency in disclosures within financial statements for supply chain finance [10]. It’s the opaqueness that means buyers and suppliers enter into payment agreements with financiers like Greensill without the capability to meet their obligations.

Greensill’s business model is reminiscent of the problematic mortgage backed security loans which were at the heart of the 2008 Financial Crisis. Such mortgage backed security loans consisted of housing loans that bankers would bundle up into packages and sell them to investors. Similarly, the Greensill business model includes packaging up their clients’ invoices and selling them to banks and investment funds. The bundled invoices weren’t rated by ratings agencies but were insured by insurance groups. This way the insurer would pay most of Greensill’s obligation if the client defaulted. The insurance on the invoice bundles meant that large financial institutions like Credit Suisse invested in the bundled invoices [11].

What’s Next?

Apollo Global Management has made a $59.5 million cash offer to buy Greensill’s intellectual property and IT systems. Through the deal, Apollo would be taking on the majority of the 500 Greensill employees in the UK Greensill Capital Management Company [12].

After the collapse of Greensill, it has become of higher importance to do thorough due diligence and to employ good hedging techniques which avoid overexposure to any one client. There are calls for Andreas Gottschling (who has served as Chair of Risk at Credit Suisse since 2018) to resign because of the risk oversight in the Greensill scandal, amongst other things [13].

There has been a parliamentary investigation into possible cronyism between the UK Government and Greensill. Former Prime Minister David Cameron took a job at Greensill two years after his tenure in government. In 2020, David Cameron began lobbying the government to allow Greensill to issue government backed loans as part of the Corporate Covid Financing Facility (CCFF) – a scheme to help big firms through the pandemic. The lobbying was unsuccessful, but what has been problematic was the informal channels Cameron used to lobby the government. Cameron sent text messages to Chancellor Rishi Sunak, contacted Treasury minister Jesse Norman and John Glen about it instead of using the formal channels for lobbying [14].

Conclusion

Overall, the Greensill scandal has proven the importance of due diligence and effective hedging to ensuring the success of supply chain finance. It has led to calls for increased transparency and formality in government and big corporation operations in the UK to avoid cronyism.

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