Greensill Capital was an invoice finance company that specialised in supply chain finance. It collapsed in March 2021 sending shockwaves through financial markets exacerbated by the scandal involving former Prime Minister of the UK, David Cameron, lobbying the government to allow Greensill to join the financing scheme set up to provide loans to businesses during the covid pandemic. This post will look at what went wrong for Greensill Captial, its supply chain finance business and what lessons can be learnt from the scandal.
Greensill Business Model
Greensill offered supply chain finance to buyers. Large corporates sold their unpaid invoices to Greensill who would pay the suppliers. These unpaid invoices would be bundled together and turned into trade receivables securities that were sold on to financial institutions such as Credit Suisse. In order to remain competitive in this market, Greensill often offered long payment terms to its larger customers.
How Did It All Go Wrong?
Greensill essentially mismanaged their client accounts. They became over-exposed to certain large customers. Some of these customers defaulted on their unpaid invoices such as GFG Alliance that ended up defaulting on $5 billion worth of loans.
At the same time Greensill Capital had an outstanding loan of $140 million from Credit Suisse. As Credit Suisse was the main funder of their reverse factoring operations this became problematic.
The first mistake Greensill Capital did was to use funding to finance transactions between ‘related parties’. This means the buyer and seller were not independent from each other. Rather there were related through ownership, board members and company policy. Such related companies are prone to give each other more leeway when it comes to settling accounts. Using supply chain finance for transactions between related parties is clearly risky.
One of the most important jobs of an invoice financier is to place retentions on lending levels. They run a financing facility that protects itself by placing limits on debtor concentration levels. In other words, they avoid a high percentage of prepayment on unpaid invoices going to any one company. Greensill Capital broke this rule in the case of GFG Alliance, who as I have mentioned, ended up defaulting on $5 billion worth of loans.
Insurance is there pick to up the pieces if things do go wrong. Sadly, their main insurer refused to renew their $4.6 billion contract over fears that Greensill were facing financial difficulties.
It is standard practice to have unpaid invoices rated by an independent ratings agency before they are sold to a Special Purpose Vehicle that can then turn the bundles into securities that hedge funds, pension funds and banks can buy, and that promise healthy returns on investment. In Greensill’s case they did not get their unpaid invoices rated before securitisation. This mistake is reminiscent of the crash in 2008 precipitated by the poor due diligence done on bundles of mortgages that became securities. Greensill went one worse: they didn’t get inaccurate analysis of unpaid invoices; they failed all together to get a rating estimate of the worth of the invoices.
How It All Comes Tumbling Down
Without insurance Credit Suisse froze Greensill’s account, leaving $10 billion that they could not use to fund further supply chain finance and securitisation.
Nothing travels faster than bad news, and soon the markets got wind of Greensill’s problems and investors and clients steered cleared.
By 2020 the end was in sight. The Japanese insurer Tokio Marine refused to renew its policy with Greensill. Investors heeded the signs and stayed clear of a company operating without full insurance and lacking liquidity.
The final act of desperation by Greensill was to employ former UK Prime Minister, David Cameroon, to directly lobby the then Chancellor, Rishi Sunak, to get Greensill on the Covid VIP lane for government contracts. The press soon got wind of this. Scandal ensued that confirmed that Greensill Capital was a pariah in the business world.