As with AIG in 2008, it is once again insurance – the supposedly sober, even sleepy side of finance – that is key to understanding the Greensill crisis.
In supply chain finance, a large company like Vodafone would tell their suppliers that, rather than waiting weeks for their bills to be paid by the telecom group, they could get a much faster payment. from Greensill Capital, with a small discount.
Greensill would pay the supplier and later accept a slightly larger payment from Vodafone. The supplier was paid faster, Vodafone was able to smooth their payments, Greensill took a small margin.
This effectively created a loan from Greensill to Vodafone. And to keep the machine going, Greensill sold the loan so he could write more. The main client of the loans was Credit Suisse, which placed them in funds sold to outside investors. Until this week.
Swiss credit suddenly announced Monday he was freezing the funds. The reason? A lapse in credit insurance, which had allowed investors to treat the fund as almost risk-free – almost as secure as cash in the bank but with a slightly better return.
As Greensill’s lawyer said this week, insurance “allows Greensill to access sources and levels of funding that it would otherwise not be able to access and that are critical sources of funding for its business.” .
Just as AIG was the global banks’ counterparty on credit default swaps in 2008 and Berkshire Hathaway was Deutsche Bank’s counterparty on leveraged super senior transactions in 2009, Greensill’s insurers played a critical role in a complex financial trading.
Without them, the machine was stuck. Greensill could not offload loans and therefore could not take out new ones. This is not practical for first-rate customers such as Vodafone. It is potentially devastating for small businesses such as those associated with Sanjeev Gupta, the metal tycoon, who are among Greensill’s biggest borrowers.
For at least four months, Greensill has brought in a well-known broker, Marsh, to try to find alternative insurers, according to court documents. No one agreed to intervene.
This week, Greensill made the desperate decision to sue its existing insurers – BCC Trade Credit, Tokio Marine and Insurance Australia – in an attempt to force them to reinstate coverage.
Greensill told an Australian court on Monday that if the policies were not extended, “Greensill’s economic viability would be immediately and seriously jeopardized as its main sources of funding and income would cease immediately.”
In addition, Greensill said he had “been told by a number of clients” that the loss of insurance “would very likely make them insolvent”. These customers would default on their Greensill obligations and Greensill’s investors would withdraw their support.
A judge ruled against Greensill and insurance was not reinstated.
Why have insurers withdrawn their coverage? Court documents show that the original main policy was written by The Bond & Credit Company, an Australian insurer acquired in 2019 by Japanese company Tokio Marine.
The insurance group wrote to Greensill in July last year to tell him that the underwriter in charge of the account was terminated because he was found to be insuring amounts to Greensill “in excess of his delegated authority”. total exceeding AU $ 10 billion. ($ 7.7 billion).
The group added that it had opened an investigation “in connection with the relationship between Greensill Capital and [the underwriter]”, Including other areas“ where he acted outside the scope of his delegated power ”. As he continued his investigation, he asked Greensill for more documents, including “any guarantees provided by SoftBank.”
SoftBank’s Vision Fund holds an interest in Greensill. Other companies in the Vision Fund’s portfolio, such as India’s Oyo hotel group, also use Greensill to pay vendors. And, finally, like the Financial Times revealed last june, SoftBank had also invested more than $ 500 million in Credit Suisse funds, essentially using its own finance company to lend to its own holding companies, and then investing in that debt itself.
Regardless of the specific development that alarmed Tokio Marine last summer, its decision to stop coverage – unknown to the world – sounded the death knell.
In July, the insurance group wrote to Marsh: “Given the current situation, we will not be able to tie new policies, take additional risk, extend or renew a Greensil. [sic] policy beyond what had previously been agreed. Please take this statement as a comprehensive response to any request from Greensil regarding additional limit coverage, maximum limit capacity or the length of an insurance period. “
Greensill refused to accept the decision, but its air of purpose was undeniable.
Reporting by Jamie Smyth in Sydney, Robert Smith and Arash Massoudi in London