Greensill Capital’s funding crisis could lead to losses for insurers and banks: analysis

LONDON – A funding crisis at Greensill Capital could impact some of its high-risk borrowers and lead to losses for insurers and banks who have done business with the UK-based supply chain finance company if its customers default, according to several industry experts and a review of public documents.

Greensill, backed by Softbank Group Corp’s Vision Fund, helps businesses 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 issue new loans.

“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.”

Earlier this week, Greensill’s main source of funding came to a screeching halt. Swiss bank Credit Suisse Group AG and asset manager GAM Holdings AG have suspended buybacks of funds that held most of their approximately $ 10 billion assets in Greensill notes. Credit Suisse said it was concerned it could assess them accurately, while GAM cited “media coverage related to supply chain finance.”

[Editor’s note: Reuters made a clarification on March 5th that GAM Holdings’ closure of the fund related to concerns about perceptions of supply chain finance rather than about asset valuations].

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, a source close to Greensill said on Wednesday. But Apollo has no plans to bail out Greensill’s borrowers and is unwilling to even provide loan services to Greensill’s riskier clients, two sources close to the talks 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 his business. Apollo, Softbank and Credit Suisse declined to comment.

The uncertainty as to what will happen over the next few days could spill over to customers of Greensill and other financial institutions.

For the company’s clients, an inability by Greensill to continue funding them may mean having to pay off debt quickly and find other sources of short-term funding, according to four experts in short-term inventory-backed finance – 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 Atlanta-based consultancy Strategic Treasurer, which advises clients on financing. of the 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 this week said in a research note that even if the Swiss bank did not suffer direct financial losses, it would suffer reputational damage from the crisis.

In addition, a bank owned by Greensill 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 incur 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 filed a criminal complaint against Bremen-based bank Greensill on Wednesday, claiming the lender was unable to provide proof of the debts it said it purchased from the finance group of GFG Alliance metals.

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. jobs. “

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 some heavily indebted clients, as publicly available accounts for borrowers show. He also loaned money to finance fixed assets such as buildings and factories, which are typically funded by longer-term funding, according to the accounts, while supply chain funding typically covers debts. short term 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 loans to businesses for around 4%, and could do so because investors would accept low returns as he made sure debts were secured by assets that would be quickly realized.

Reuters was unable to find out the specific rate Greensill charged GFG and how much of Credit Suisse and GAM fund assets are represented by GFG loans. Past accounts of the funds and companies involved show hundreds of millions of dollars in outstanding credit at all times.

GFG Alliance spokesman Andrew Mitchell said the group had alternative funders in Greensill.

“GFG Alliance has adequate current funds and its plans to bring in new capital through refinancing are progressing well,” he said, adding that troubled companies bought by GFG were recovering and generated positive cash flow.

German exhibition

Any customer default 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 latest information on capital requirements shows that in 2019 it took over $ 1 billion in exposures in Macedonia, the Czech Republic and in Romania, after GFG started operating 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 suffered by Credit Suisse funds could also be passed on to more than one party. Credit insurers sold the Credit Suisse funds and the Greensill protection against defaults on the Greensill securities purchased by the funds. While Greensill Capital is responsible for the initial losses on funds to the tune of $ 1 billion, accounts show 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 Greensill’s creditor. 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 talks contemplate the potential buyer taking over debts or those held by Credit Suisse funds. Credit Suisse declined to comment on the debt.

(Additional reporting by Abhinav Ramnarayan and Carolyn Cohn in London and Brenna Hughes Neghaiwi in Zurich; editing by Paritosh Bansal and Edward Tobin)

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