The Grim Demise of Greensill Capital
“Money guy” is the term SoftBank CEO Masayoshi Son used to describe Lex Greensill at a meeting with Indonesian President Joko Widodo.
A year later, the same money guy’s failed venture Greensill Capital declared bankruptcy post a massive financial implosion that has left its cinders on the British political leadership, a dodgy Indian industrialist, Credit Suisse and SoftBank itself.
What happened was a series of financial irregularities committed by Greensill Capital (and others) which specialised in invoice discounting. A company that was valued at $3.5bn less than two years ago is now insolvent and faces litigation in multiple jurisdictions.
What went wrong?
A combination of unsecured lending, inflated financing models based on speculative future invoices and aggressive derivatives lending is what made Greensill’s core business tick, until the insurance coverage on its underwritten loans expired.
Let’s simply this further.
The “Lex”ington Debt Avenue
At the centre of the implosion is Lex Greensill, an Australian financier. A former employee of Citigroup and Morgan Stanley, Greensill, by his own admission, was committed to working ways in which to make supply chain finance more accessible.
The idea was inspired from his own childhood experience of growing up in an Australian melon farm when he noticed how his parents faced undue delays in fetching payments for their produce because it took so long for their crops to turn into money.
So, when he went on his own and started Greensill Capital, the objective was to introduce smart innovation into invoice discounting. He turned this mundane sub-set of finance into an ultra-lucrative business by playing around the risks. Let’s see how.
The Basics of Invoice Discounting
Typical payment terms between suppliers and their clients last almost 60–90 days. At the end of the terms, an invoice is generated and the supplier is paid. Say, X, a clothing merchant supplies fabric to the chief producer Y, who then passes the supply down the chain to the dyers, tailors and retail stores who sell the finished item of clothing. X won’t get paid until the proceeds from the sales come through.
Enter Greensill, a financier to whom X sells the invoice and receives payment with a haircut. The financier will collect full payment from Y at a later date and pocket some interest.
To be fair, although this model became popular over the last two decades, it is a 4,000-year old practice that dates back to the Bronze Age. Greensill attempted to spin it as a “democratisation of capital” idea that came with three different spins to be exact.
The first is called “factoring”, which is the process just described above. It is the most basic form of invoice discounting where the financier pays the supplier early on at a discount. It is also called “receivables financing” because the lenders or financiers like Greensill effectively finance companies’ payables and receivables.
The second is called “reverse factoring”. Here, the financier pays off the debts owed by a company to its suppliers, again for a discount.
The third is the most aggravated format of this innovation which most likely led to the demise of Greensill. Over here, Greensill (the financier) paid off a prospective supplier early for hypothetical receivables that may have taken place in the future. So, essentially, this is lending money before the sale has been made based on the expectation of future sales and payments, and is rightfully called “prospective receivables finance”.
To make prospective receivables financing more “secure”, Greensill had the debt insured by Tokio Marine, a Tokyo-based multinational insurance holding company.
The Collateral Damages of Uncollateralised Debt
Three things you should know. First, SoftBank, one of the biggest global investors, invested $1.5bn in Greensill in 2019 through its Vision Fund. The Vision Fund is the world’s largest tech-based venture capital fund and it supports a number of startups. SoftBank’s interest in Greensill was chiefly because the latter could help gain its startups financial access.
And so it did, which brings us to the second thing. Some of the financing that Greensill secured for these startups was predicted on future sales, not actual invoices. These loans were securitised and turned into bond-like instruments called notes.
Third, some of these notes were bought by Credit Suisse through a now-closed $10bn supply chain fund. Now, this fund was relied upon by Greensill to a great extent. But after the pandemic, investors withdrew a chunk of it compelling Greensill to turn to SoftBank again for finance.
What is interesting is the manner in which this financing was done because this time, SoftBank poured money into the Credit Suisse funds which Greensill could utilise eventually. The same funds, incidentally, also lent close to $750m to four Vision Fund companies by March 2020 (FYI: One of the four companies was Oyo). By the end of last year, Greensill was so leveraged that SoftBank owned about a fourth of it.
When Tokio Marine realised it was insuring amounts close to $7.7bn for Greensill, it decided to stop its coverage from July onwards. Upon this intimation, Credit Suisse was compelled to liquidate its supply chain fund and that is when it all went down.
Accounts Payable
The biggest headline related to the Greensill fiasco has been with GFG Alliance’s (GFG) exposure to it. GFG, run by dodgy UK steel tycoon Sanjeev Gupta, borrowed almost $5.4bn from Greensill over time, a large part of it secured over GFG’s prospective receivables. However, many of GFG’s invoices are now turning out to be fraudulent (hence the “dodgy”)!
Only time will tell if Lex Greensill and Mr. Gupta were hand-in-glove in this fiasco.
Meanwhile around 35,000 jobs across 30 countries affiliated to GFG are now at risk…
(Originally published April 13th 2021 in transfin.in)
