Analysis: Greensill’s Funding Problems Could Cause Wide Ripples
A funding crisis at Greensill Capital could spread to some of its high-risk borrowers and result in losses for insurers and banks who have done business with the UK-based supply chain finance company in the event failure of its customers, according to several industry experts and a review of public filings.
Greensill, backed by Softbank Group Corp’s (9984.T) Vision Fund, helps companies allocate the time they have to pay their bills. The loans, which typically have maturities of up to 90 days, are securitized and sold to investors, allowing Greensill to make new loans.
Earlier this week, Greensill’s main source of funding came to an abrupt halt. Swiss Bank Credit Suisse Group AG (CSGN.S) and asset manager GAM Holdings AG (GAMH.S) suspended buybacks of funds that held most of their approximately $ 10 billion assets in Greensill Notes. Credit Suisse expressed concern about being able to assess them accurately, while GAM cited “media coverage related to supply chain finance”.
Greensill is preparing to file for bankruptcy and is also in talks to sell much of its business to private equity firm Apollo Global Management Inc (APO.N)a source close to Greensill said on Wednesday. But Apollo is not planning to bail out Greensill’s borrowers and does not even want to provide loan services to Greensill’s riskier clients, two sources close to the talks have said due to financial and reputational risks.
Although Greensill did not name Apollo, he confirmed on Tuesday that he was in talks with “a leading global financial institution” to buy out his company. Apollo, Softbank and Credit Suisse declined to comment.
The uncertainty about what will happen over the next few days could spill over to customers of Greensill and other financial institutions.
For the company’s clients, Greensill’s inability to continue funding them may mean having to quickly repay debt and find alternative sources of short-term funding, according to four experts in short-term, inventory-backed funding – or “ supply chain ” -. of the type proposed by Greensill.
This could be particularly problematic for its high-risk clients, who may find it difficult to raise funds elsewhere or have to pay significantly more for financing.
“If you only have one source for this type of capital, you may have to scramble,” said Craig Jeffrey, of the Strategic Treasurer board near Atlanta, which advises clients on financing the company. supply chain.
Any inability of borrowers to pay could, in turn, result in losses for credit insurers who sold default protection on Greensill securities purchased by Credit Suisse funds. And if those insurers don’t pay, investors could sue Credit Suisse to cover their losses, said Thorsten Beck, professor of finance at the University of London. Morgan Stanley analysts said in a research note this week that even if the Swiss bank did not suffer direct financial losses, it would suffer reputational damage from the crisis.
In addition, a Greensill-owned bank in Germany, which keeps the company’s short-term loans on its balance sheet before they are securitized and sold to Credit Suisse, could also experience losses if the sudden withdrawal of credit results in payment defaults. on the debts it held temporarily, according to the staff reports and the published accounts.
German financial regulator Bafin lodged a criminal complaint against Bremen-based Greensill Bank on Wednesday, claiming the lender could not provide evidence of debts it allegedly purchased from metalworking group GFG Alliance.
In a statement to Reuters, Greensill Capital spokesman James Doran said talks were underway with a suitor over a deal for parts of his business that could help preserve operations and jobs. “While the structure of the new business is still being worked out, we anticipate that the transaction will ensure that the majority of Greensill’s clients will continue to be funded in the same way they are currently while preserving a substantial number of ‘jobs. ” Read more
Greensill Bank “always seeks external legal and audit advice before reserving a new asset,” added Greensill Capital. He declined to comment on Bafin’s specific claim. GFG did not respond to requests for comment on Greensill Bank.
SUPPLY CHAIN MODEL
The supply chain loan model is generally viewed as a relatively low risk investment. But Greensill, formed in 2011 by former Citigroup banker Lex Greensill, has taken on heavily indebted clients, according to borrowers’ public accounts. He has also loaned money to finance fixed assets such as buildings and factories, which are more typically funded through longer-term funding, according to the accounts, while supply chain funding typically covers short-term debts such as payment for inventory.
One of its biggest clients is GFG, run by Indo-British metal magnate Sanjeev Gupta. GFG Alliance had to pay an interest rate of 12% when it issued debt on the public markets in 2019.
But Greensill said his company typically provided business credit of around 4%, and could do so because investors would accept low returns as he made sure debts were backed by assets that would be quickly realized.
Reuters was unable to find out the specific rate Greensill charges GFG and the share of Credit Suisse assets and GAM funds coming from GFG loans. Previous accounts of the funds and companies involved show hundreds of millions of dollars in unpaid credit at any given time.
GFG Alliance spokesman Andrew Mitchell said the group has alternative funders in Greensill.
“GFG Alliance currently has adequate funds and its plans to bring in new capital through refinancing are progressing well,” he said, adding that the struggling companies bought by GFG were on the rise and generating cash flows. positive cash flow.
Any default by a client could also impact Greensill Bank in Bremen, Germany, according to a review of credit reports and published accounts. The bank’s exposure to GFG is unclear, but its most recent disclosures on capital requirements show that in 2019 it took over $ 1 billion in exposures in Macedonia, Czech Republic and Romania, after GFG started doing business in these countries.
Greensill Bank is largely funded by around € 3 billion in deposits and depositors are protected by the bank’s membership in the deposit protection fund of the Federal Association of German Banks.
Greensill Bank declined to answer questions about its finances and neither it nor Credit Suisse is disclosing its exposure to individual companies.
Any loss to Credit Suisse funds could also be attributed to more than one party. Credit insurers sold the Credit Suisse funds and the Greensill default protection on the Greensill securities purchased by the funds. While Greensill Capital is responsible for the first losses on funds to the tune of $ 1 billion, according to the accounts, insurers are covering much of the rest, Credit Suisse said in January.
Credit Suisse declined to confirm whether the debts currently in the fund are covered by insurance and who covered them.
Credit Suisse is also a creditor of Greensill. The Zurich-based bank has $ 140 million in outstanding loans to the company, a source familiar with the matter said.
Greensill declined to say whether the sale negotiations envisioned the potential buyer taking on their debts or those held by Credit Suisse funds. Credit Suisse declined to comment on the debt.
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