A massive murky mess of supply-chain finance, amid criminal allegations against the management of its German bank subsidiary, with wide repercussions.
Supply chain finance giant Greensill Capital is expected to file for insolvency in the UK, and its parent company in Australia has already filed for insolvency there, after its credit insurers refused to renew $4.6 billion in credit insurance policies on March 1. Those policies provided protection against default of some of the holdings in the Credit Suisse supply-chain funds for which Greensill sourced the assets.
Greensill warned of “catastrophic” consequences if its credit insurance policies are not renewed. Some of the 40 clients covered could become insolvent, it said, putting at risk as many as 50,000 jobs globally, including thousands of jobs in the UK’s steel industry.
Credit Suisse, one of the firm’s biggest sources of funding, responded to the news that the credit insurance had lapsed on Monday by freezing four funds managed by Greensill with a combined book value of $10 billion. Swiss fund management giant GAM Investments followed suit on Tuesday by closing its $842 million GAM Greensill Supply Chain Finance fund to subscriptions and redemptions. Both companies said they had frozen the funds due to concerns about the true value of Greensill’s assets.
On Wednesday, Germany’s financial regulator BaFin announced that it had imposed a moratorium on Greensill Bank. The ban, covering both disposals and payments, was necessary because of “an imminent risk that the bank will become over-indebted,” said BaFin. The watchdog also filed a criminal complaint against the bank’s management for suspected balance sheet manipulation.
On Thursday night, Greensill Bank’s biggest client, Sanjeev Gupta’s GFG Alliance, announced that it had begun withholding payments.
Greensill is one of the world’s biggest providers of supply chain finance, also called “reverse factoring.” On its website Greensill claims that it issued over $143 billion in funding to over 10 million customers in 2019.
A company with accounts payables hires Greensill to pay its suppliers promptly (e.g. 15 days after invoicing) in return for a discount on their invoices. The company repays Greensill at a later date, thereby converting its trade accounts payable into a financial debt, without having to disclose it as financial debt.
Greensill, rather than wait for the payment from the company, bundles the invoices into securities and sells them to asset managers, insurers, and pension funds. In Greensill’s case, one of the biggest buyers was Credit Suisse.
For Greensill’s client companies, the fact that they don’t have to disclose this financial debt from supply chain finance allows them to conceal the true size of their debts, leaving investors and creditors with bigger losses when they finally do collapse…
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