Doubt fed hesitancy, hesitancy fed anxiety. Occasionally something surfaced in the financial press to keep the embers of concern glowing. Then a trio of Australian insurers doused the thing in petrol, and up it went.
At the tender age of 44, Lex Greensills dream of making finance fairer looks to have been reduced to ashes.
Greensill had made the task of helping small companies get paid more quickly into a lifes work. As company lore has it, he was barely out of the Bundaberg family farm, and still putting himself through law school at night, when he began working with the Fruit and Vegetable Growers Association on ways to get farmers invoices paid more quickly.
By the time he was in his late 20s and living in London, he was fully immersed in the opaque world of supply-chain finance, first at Morgan Stanley then at Citigroup.
The banks have been doing supply-chain finance, or factoring, for aeons. Small suppliers can juice their cash flow by getting a bank, instead of a customer, to pay them the money theyre owed by the customer. The customer then owes the money to the bank, rather than the supplier and that receivable is a bank asset.
Beneficially, but problematically, the money owed to the bank, while likely on better terms than conventional credit, doesnt count as debt on the customers balance sheet. It may look and smell like debt, but its still officially a trade payable; or, if the bank client is borrowing against its own issued but unpaid invoices, an account receivable. This distinction lies near the heart of Greensills difficulties.
In 2011, Lex Greensill started his own company, believing he could get both ends of the supply chain a better deal than his former employers were offering.
He brought fintech-like agility to the transaction, and funded it by packaging up bundles of receivables as bonds rather like mortgage securitisation which he could sell to investors.
Because his big customers the businesses whose supplier invoices he was paying were mostly blue-chip companies with investment-grade credit ratings, they appeared secure investments. They were also backed by trade credit insurance, which meant investors were protected if any Greensill client couldnt pay up. It wasnt simple, but it seemed safe.
In 2014, Greensill bought a small German bank as a vehicle for holding these assets on a balance sheet. In 2017, Swiss giant Credit Suisse began operating a collection of supply-chain finance (SCF) funds through which short-term Greensill paper rotated at pace. These attracted institutional investors and family offices looking for a place to park cash at higher yields than they could get elsewhere.
By and large, the business motored along. It was soon managing receivables in more than 100 countries, and the sky seemed the limit. But to get lift-off, Greensill had made what looks to have been a fateful choice.
A start-up company often benefits from recruiting one or more big clients, who give the business a launch platform, a bit of momentum. For Greensill, that client was Sanjeev Gupta, at the time a commodities trader in his early 40s who was rapidly snapping up failing, fading steel plants around the world.
In early 2020, Lex Greensill was on top of the world after hiring former foreign minister Julie Bishop as an adviser. Andy Mettler
In the time it took Greensill to become a $US7 billion financial player, Gupta and his GFG Alliance amassed a $US20 billion portfolio of assets which includes the Australian steel business Infrabuild, the Whyalla steelworks in South Australia and a Tasmanian manganese smelter.
Guptas breakneck buying spree required plenty of funds, acquired at pace and Greensill was on hand to provide it. It was a mutually beneficial relationship, buoyed by their shared sense of political purpose Gupta is proposing a green revolution in world steelmaking and their workaholic determination to prosper.
The Financial Times has reported that as much as half the assets on the 3.5 billion ($5.4 billion) balance sheet of the German Greensill Bank might be Gupta-related. The Australian Financial Review has reported that at one point something like one-third of the financing of one Australian Gupta business, OneSteel, came from receivables-secured Greensill loans.
Guptas network of companies and funding arrangements has been regularly picked over in the financial press, with concerns raised over the conglomerates lack of transparency in financial reporting.
For Greensill watchers the insurers, fund managers, investors, regulators, and the occasional politician, academic or journalist a key issue was the disproportionate size of Greensills exposure to Guptas empire, and the difficulty in determining just what kind of a credit risk Gupta poses.
GFG Alliance this week tried to put those concerns to rest. It said the company was riding an upswing in the steel and aluminium markets, powering demand and cash flow. The company says it has adequate funding, even with the loss of Greensill.
On Thursday (Friday AEDT), the Financial Times reported that Gupta had stopped making payments to Greensill. A day earlier, Gupta shut down the retail arm of his bank, Wyelands, which will now focus on business lending including a suite of factoring and trade financing options that could replicate its Greensill funding.
Regardless of Guptas actual finances, his outsize presence on Greensills books, and the attention his dealings attracted, have fuelled a broader uncertainty about Greensills portfolio.
For several years, this seemed not to matter. There was a minor scandal involving Greensill and Gupta offering lavish hospitality to an enthusiastically supportive fund manager at Swiss investment house GAM in 2018, but it seemed to blow over.
Japanese giant SoftBank ploughed $US1.5 billion into the company in 2019 a stake now reportedly written down. Greensill used the money to accelerate its global expansion, hiring former foreign minister Julie Bishop to chair its Asia-Pacific business.
That same year, one of the companys major insurers, trade credit specialist BCC, inked contracts with Greensill to insure the risk in its bonds until March 1 this year.
The winds started to shift in early May last year, when it came to light that a trio of Greensill clients hospital operator NMC Health, retailer BrightHouse and Singaporean commodities trader Agritrade had gone bust in quick succession. Greensill and its insurers had to cover losses in the Credit Suisse funds.
From a Greensill point of view, insurers and investors should have known that the occasional default was inevitable. These were not large exposures, the losses were covered, the vast majority of the portfolio was fine. But something clicked.
Almost immediately afterwards, BCC reined in its Greensill-wrangler, Greg Brereton. As court documents released this week show, on May 28 he was told he had been exceeding his delegated authority and was no longer allowed to add fresh Greensill exposure to the insurers basket of risks.
BCC, which also raised concerns about the lack of documents provided by Greensill to assess risk, notified Greensills insurance broker, Marsh, on July 2 that no new Greensill risk would be taken on without the say-so of a director from BCCs parent company, Tokio Marine. Marsh responded with surprise.
By July 8, Brereton had been shown the door and BCC had launched a formal investigation into the Greensill account, saying it would not assume responsibility for $10 billion of exposures that Brereton had signed off. Marsh pushed back again, saying Greensills 19 other underwriters were happy with Greensills documentation and compliance practices.
On September 1, BCC told Marsh that regardless of what its investigation found, it would let its cover lapse when the policy contract expired in March 2021.
This was a bombshell: without that insurance, which covered a chunk of Greensill business that its other insurers would not be able to digest, the company could no longer package up and sell bonds. The Swiss funds would walk away, and its German bank would be under-capitalised.
Getting new clients was also getting harder in Australia, where companies use of Greensills supply chain finance schemes to delay paying bills were under scrutiny from the Financial Review and regulators, damaging Greensills reputation and forcing it to announce it would stop doing business with companies that abused its services.
In October, meanwhile, another front opened up. Germanys financial regulator BaFin began an audit of Greensill, seemingly again based on press reports, to gauge whether the bank was too heavily exposed to a single risk Gupta and whether its lending against receivables was all properly documented and secured.
The squeeze was on, even if not in plain sight.
Its unclear how worried Greensill became. A roadshow for a $1 billion capital raising and a potential public float went ahead in October. The company looked for another insurer to replace BCC, albeit unsuccessfully; and it negotiated with BCC without prejudice on a new contract. BaFin asked for various exposures to be reclassified, and the bank complied.
Even at the end of January, it may have appeared as if a difficult passage of play could be successfully negotiated.
But the countdown clock to March 1 began to tick ever louder. On February 27, Greensill seems to have consulted a calendar, and its contract, and realised that BCC had given only 179 days notice of intention not to renew the insurance, not the required 180 days. In theory, this would force the insurer to roll the contract over. The next day, Greensill told BCC it would go to court to ensure this happened.
Then came a surprising twist. When BCC signed the 2019 contract with Greensill, the insurer was owned by IAG. But IAG sold the business to Tokio in April 2019, and handed it over on July. BCCs solicitor told Greensill that Tokio, and therefore BCC, were not bound by an IAG contract.
But wait. IAG then told Greensill it had sold BCC, so its obligation only extended to policies written before June 30, 2019 it wasnt bound by the contract after that date, either. And it had told Greensill on February 15 that it wouldnt be renewing or rolling over a mere two-week notice period, as allowed under insurance law.
Both insurers had washed their hands of Greensill. This, as Greensill admitted in its court submission on March 1 for an emergency policy rollover, was disastrous and catastrophic.
Greensill Bank would no longer be able to provide funding. Clients would immediately fall into strife, and default on debts. Insolvencies would follow. Greensill would then be unable to tap the capital markets at all, leading to further insolvencies among clients reliant on Greensill funding. The company claimed that 50,000 jobs could be lost worldwide, including 7000 in Australia.
Greensill lost the argument in court. The insurance lapsed. And then all the delicately balanced dominoes came tumbling down.
Without the insurance cover to mitigate its risk, Credit Suisse immediately shut the four Greensill funds, worth a combined $US10 billion, the same day. GAM closed its $US842 million Greensill SCF fund the next day.
Both are also understood to have been concerned at the extent and opacity of the Gupta exposure, and the heavy breathing from BaFin, whose audit had surfaced in the press the week before.
BaFin itself then swung into action. Without insurance, Greensill Bank did not have required level of secure assets underpinning its book. The regulator closed the bank a moratorium of at least six weeks and later confirmed it was looking at criminal prosecution for alleged balance-sheet irregularities and invoice documentation.
Insolvency was on the cards for Greensill, and with it a rapid-fire sale to US private-equity giant Apollo Global Management of all the potentially viable assets and operations staving off a string of potential corporate insolvencies.
Reports suggest Apollo wants to carve out the Gupta exposures and leave them for an insolvent Greensill to unwind. In that sense at least, Gupta, who did so much to propel the Greensill fairytale, will be there at its most unhappy ending.