May 8, 2021

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Greensill and supply chain finance: how a litigation finance tool works

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Since its inception ten years ago, Greensill Capital has grown explosively to become one of the largest providers of supply chain finance.

But the group, backed by SoftBank and advised by former British Prime Minister David Cameron, is now run to make a bailout deal after Credit Suisse froze $ 10 billion in funds linked to the company.

The crisis has put the spotlight on supply chain finance, a controversial technique that has aroused the ire of regulators, rating agencies and accountants.

What is supply chain finance?

It is sometimes called “reverse factoring” because it is a new twist on a business. centuries-old technique to collect funds from invoices.

Concretely, the process implies that a financial institution agrees to pay the invoices that a company owes to its suppliers. The trade-off for suppliers, often small businesses with large multinational customers, is that they get paid quickly, albeit slightly less than they are owed.

The financial institution later collects the full invoice amount from the large company, which actually pays a small fee to smooth its lump sum payment schedules.

Greensill arranges this type of financing for companies either through a bank it owns in Germany or by bundling these supplier invoices in bond-type investments for Credit Suisse funds. He earns money by being the intermediary between companies and investors.

The business also does traditional factoring – in which a business sells its customer invoices at a discount.

Why is this controversial?

The short answer: its accounting treatment.

While a business that uses supply chain finance owes a financial institution money, accountants do not classify these facilities as debt. Instead, a business typically posts money owed in the “suppliers” or “accounts payable” line of its balance sheet, mixed with all other invoices owed to suppliers.

While an accounts footnote can explain the extent to which this line is actually money owed to financial institutions rather than vendors, it does not need to be disclosed.

Former UK Prime Minister David Cameron acts as Greensill’s adviser © Chris J Ratcliffe / AFP / Getty

Lack of disclosure has troubled both rating agencies and regulators, including the United States Security and Trade Commission. The big four audit firms have also drafted a joint letter the American FASB accounting control in 2019, asking for “more transparency and consistency” in financial information.

Why can this be dangerous for businesses?

Supply chain finance is a legitimate and increasingly common tool for large multinational companies.

But the lack of disclosure means it has also proven popular with struggling companies looking to hide their growing borrowings. When nervous lenders snatch these facilities away from heavily indebted companies, it can create a bank-managed effect on their working capital position.

Supply chain finance was at the heart of the 2015 collapse of Spanish clean energy company Abengoa. Greensill arranged financing for the Spanish company via an off-balance sheet vehicle.

Before its demise in 2018, the British construction group Carillion made extensive use of supply chain finance program. MPs investigating the contractor’s disappearance said the program had enabled him to “support his failing business model”.

While Carillion was not a client of Greensill, Lex Greensill, the founder of the financial firm, helped design the government program he relied on when working as an advisor to Prime Minister Cameron in 2012.

Potentially toxic to weak businesses, supply chain finance can be a gold mine for short sellers who scour company records for its overuse. When the US hedge fund Muddy Waters published a report alleging fraud at hospital operator NMC Health in December 2019, it included references to FTSE 100’s use of Credit Suisse funds linked to Greensill.

Less than six months after the report, NMC filed for administration.

Did Lex Greensill Invent Supply Chain Finance?

Lex Greensill, a 44-year-old former investment banker, said his business idea was shaped by his experience growing on a watermelon farm in Australia, where his family endured financial hardships when large companies delayed payments.

But he didn’t invent supply chain finance – banks in the United States and Europe have been providing this type of finance to their customers for decades.

However, his firm has been at the forefront of creating even more complicated structures for certain companies. Flight revealed Last year, SoftBank poured over $ 500 million into funds at Credit Suisse, which then made big bets on the debt of struggling startups backed by the Japanese tech conglomerate’s Vision Fund.

Lex Greensill, the founder of the company © Ian Tuttle / Shutterstock

Greensill was at the heart of this circular flow of funding, having both found the fund’s assets and counting SoftBank’s Vision Fund as one of his own. shareholders.

What Happens to Greensill Customers?

It depends. Credit Suisse $ 10 billion fund freeze means it is no longer able to invest in new supply chain finance paper, which could in theory throw a company’s finance into turmoil.

Customers such as Vodafone and AstraZeneca with good investment ratings will use multiple supply chain finance providers and should have little difficulty finding demand elsewhere.

In addition to considering a deal to purchase some of Greensill’s operating assets, private equity firm Apollo is looking to take over some of these valuable supply chain finance relationships with blue chip companies, by l ‘intermediary of one of its insurance subsidiaries.

But lower-rated companies without greater access to finance may face a more difficult situation. Sanjeev Gupta, a British industrialist and one of the Customers closest to Greensill, is the subject of a special examination.

German financial regulator BaFin is pushing Bremen-based Greensill Bank to reduce exposure to Gupta, after surveying the bank’s balance sheet and raising concerns about the level of risk associated with a single customer.

Apollo specifically ruled out taking any funding for the Indian-born industrialist. Gupta’s efforts to borrow hundreds of millions of dollars from Canadian asset manager Brookfield have also molten.

A spokesperson for Gupta’s GFG Alliance said it “has adequate funding for its current needs and its refinancing plans to broaden its capital base and secure longer term funding are progressing well.” .



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