Lex Greensill’s ambitious plan to transform his arcane trade-finance business into a global lending force is rapidly falling apart.
From Credit Suisse Group AG to SoftBank Group Corp., Greensill’s most ardent supporters have signaled doubts about the loans made by his supply-chain finance business, upending his multi-billion dollar empire. Greensill Capital, which as recently as last year was seeking a valuation of $7 billion and planning to eventually go public, is now discussing options including insolvency, according to people familiar with the matter.
Greensill Capital on Tuesday made use of so-called “safe harbor protection” that’s allowed under Australian insolvency laws, according to another person familiar with the matter. The move effectively buys directors more time to work out alternative financing as it protects them from personal liability for insolvent trading.
At the heart of the swift unraveling at Greensill’s firm -- specializing in a loosely regulated type of short-term corporate lending -- is a fundamental question that many investors are now asking: How creditworthy are his borrowers?
For Credit Suisse, the answer isn’t straightforward. The firm has frozen a $10 billion family of funds that invest in Greensill-sourced loans, citing “uncertainty” about the valuations of some of the debt. At SoftBank, Greensill’s biggest backer, the realization has been more stark. Softbank’s Vision Fund substantially wrote down its $1.5 billion stake in Greensill at the end of 2020, and is considering dropping the valuation close to zero, people familiar with the matter said.
It’s the culmination of almost three tumultuous years at the firm founded by the 44-year-old financier. Greensill-linked financings played a role in the demise of a former star bond manager at GAM Holding AG in 2018. Last year, Germany’s banking regulator BaFin pushed the businessman’s lending unit, Greensill Bank, to reduce risks on its balance sheet by cutting loans tied to a single U.K. entrepreneur, Sanjeev Gupta.
For money managers piling into niche markets in search of higher yield, the episode is yet another reminder of the risks inherent in hard-to-value assets. The demise of Neil Woodford’s investment firm and a crisis at H20 Asset Management were triggered by their holdings of unlisted companies and unrated bonds. While Credit Suisse’s funds aren’t targeted at mom-and-pop investors, many larger clients are becoming increasingly nervous about holding assets whose value is tough to determine.
Read more: King of Supply-Chain Finance Expands, and Controversy Follows
Greensill rose from working on his family’s melon and sugar cane farm in Australia. His interest in the supply-chain business was fueled early on in his life, when as a teenager, a bad harvest season meant his parents weren’t paid for the crops that they grew. Greensill later built a business at Morgan Stanley in London financing corporate supply chains, and then worked at Citigroup Inc. before starting his own company in 2011.
Greensill always knew that the plan to disrupt a niche area of finance would come with its share of skeptics. In an interview with Bloomberg News in December, he acknowledged that his firm is “doing things a little different to what’s been done before, and that’s always going to kind of garner attention and commentary.”
In October, Greensill’s firm had been considering a capital raising that would have valued it at $7 billion. At the time, when its banking arm was facing regulatory scrutiny and clients had hit financial difficulties, the firm said that the fund-raising would help boost growth. More recently, the firm was in talks with Apollo Global Management Inc. on a multi-billion dollar financing deal that would give the supply chain more headroom, Sky News reported last month.
Read more: Greensill Bank Looks to Raise Cash, Cut Risk to Sanjeev Gupta
In addition to discussing the possibility of insolvency, Greensill is now in talks on a sale of its operating business to Apollo, people familiar with the matter said.
Credit Suisse’s decision to suspend its funds came after credit insurance recently lapsed on some of the loans Greensill made, according to people briefed on the matter. That left some debt no longer valued on the strength of the insurer but rather on the underlying borrower, the people said. The freeze has left Greensill’s firm without a key buyer of the debt it arranges for companies.
It also adds to a series of hits to the Zurich-based bank, which is still recovering from a damaging spying scandal a year ago. Since then, new Chief Executive Officer Thomas Gottstein has had to contend with legal charges related to mortgage-backed securities in the U.S. and a writedown on a hedge fund investment. The bank was also left staring at steep losses, along with other lenders, when the stock of Luckin coffee imploded in an accounting fraud.
In addition to being an early Greensill backer, SoftBank was also an investor in the Credit Suisse supply-chain funds. The conglomerate pulled $700 million out of the Credit Suisse funds last year amid conflict-of-interest accusations that sparked an internal review at the Swiss bank. The investment into Greensill by SoftBank’s Vision Fund was led by former managing partner Colin Fan, who recently left his role at the behemoth investment fund. Many of the companies that were financed by the investment vehicles were also Vision Fund portfolio companies, including Indian hotel chain Oyo and Fair Financial Corp.
After its review last year, Credit Suisse overhauled the funds’ investment guidelines to limit how much exposure they can have to a single borrower, but kept some loans to companies backed by SoftBank, according to latest available fund documents from Credit Suisse. The bank had been looking at ways to reduce its ties to Greensill, people familiar with the matter said earlier Monday.
Credit Suisse is considering winding down the investments packaged by Greensill, replacing the firm as the main source for the assets, or moving loans to firms linked to Gupta out of its supply-chain finance funds, the people said, asking for anonymity because a decision hasn’t been made yet. It’s unclear how much of the Credit Suisse supply-chain finance funds are currently tied up with Gupta.
“Greensill acknowledges the decision by Credit Suisse to temporarily gate the two Supply Chain Finance Funds dealing in Greensill-sourced assets,” a spokesperson for the firm said by email. “We remain in advanced talks with potential outside investors in our company and hope to be able to update further on that process imminently.” The spokesman declined to comment on any discussions on the sale or insolvency of the operating company.
Securities linked to Gupta and arranged by Greensill were among investments at the center of a 2018 crisis at GAM that brought down star trader Tim Haywood. While assets managed in GAM’s supply-chain finance funds were relatively short-term, other funds that held some longer-term loans to Gupta took almost a year to liquidate those.
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