Greensill Capital, a fintech company that was based in the UK and Australia and started life providing supply-chain finance, was ultimately able to venture beyond this and into the world of conventional banking. Founded in 2011 by Lex Greensill, its subsidiary in Germany called Greensill Bank became the subject of a criminal complaint by the financial regulator BaFin in 2020, and, in March 2021, Greensill Capital filed for insolvency protection. The company’s affairs became a scandal when it emerged that former UK prime minister David Cameron had been approached as a consultant for the company and allegedly attempted to influence the British Government to financially assist the failing organization. Greensill’s rise and decline is, perhaps, a cautionary tale for the world of trade finance...
From the beginning, the lure of Greensill Capital was in its new technology. As De Paoli and Rocks outline for Bloomberg Businessweek, Greensill was employing artificial intelligence to qualify the risks of loans. Their business was in supply-chain finance: typically playing the role of a mediator by paying a supplier at a discount (and freeing up their capital) and then collecting the full amount from the buyer sometime later. . Greensill, rather than solely employing their own money, also sold the debentures to investors who regarded them as very low risk and with fruitful returns.
There was some logic to this: the loans themselves rested on established sales and Greensill had apparently found a way to liberate cash flow while identifying the best investments. In 2019, SoftBank, through its Vision Fund, invested $800 million in Greensill Capital, such was Greensill’s progressive technological persona. At the time, it had plans to use the capital to penetrate into the markets of China and India, and further expand into Brazil, as well as to utilize the capital finance sector.
Greensill was valued by Bloomberg as being worth $3.5 billion (although this varies depending on the source), and the founder – Lex Greensill – was ranked among the world’s richest people. The company itself is thought to have provided financing to over 8 million clients (once again, this varies depending on one’s source). At ground level, with Soft Bank’s injection of cash, Greensill was able to over double its workforce between 2019 and early 2021, expand its locations to sixteen offices, and deviate from other fund-raising options such as initial public offerings
A Model for Business
Specifically, Greensill Capital described in court filings that its operations covered three areas. These were supply chain finance (or reverse factoring), accounts receivables finance (factoring), and something that Greensill itself called ‘future accounts receivables finance’ (FARF).
Typically, factoring and reverse factoring encapsulate the role of a mediator who provides a supplier or a retailer with the means to speed up the transactional process between each party, and ideally, creates the capacity to track the approval of invoices and settlements from their outset to completion. All the parties involved in the transaction benefit in different ways – suppliers get quicker access to the funds they are owed, retailers are given more time to settle outstanding balances, and the mediator ultimately makes money through fees added to the capital they provide.
As pointed out by Reuters, at the pinnacle of the coronavirus pandemic, supply chain financing hit unprecedented levels within Europe with banks alone making $27 billion in fees. Perhaps where Greensill has been most controversial is in the third category of its business: FARF.
In essence, this entails providing finance to a company before the said business has made a sale. Keeping in mind how investors deemed supply chain finance a more reliable and low-risk return, by not waiting for the sale to have already occurred but rather anticipating it, Greensill significantly increased the risk profile of a given transaction. Added to this was the fact that Greensill professed to have in its possession a technology that was capable of gauging liability. Presumably, Greensill’s technology served to allay the fears of prospective investors, even if the company was pushing its business model to its limits (as can be seen in figure 1 with a snapshot of the company’s riskier clientele). Figure 1: Snapshot of riskier companies to whom Greensill provide
In order for Greensill to conduct its financial activities, it became reliant on loans offered by Credit Suisse’s specialized supply-chain investment funding. In effect, Greensill issued notes that would be bought by the investment funds and in return, Greensill was supplied with capital.
The company guaranteed repayment of the loans through its assertion of funds paid to the suppliers of its clients. Both Bloomberg and The Wall Street Journal, however, indicated that the notes were rooted in Greensill’s FARF practices. Consequently, the notes themselves were based on hypothesized sales rather than tangible ones and therefore exposure was manifestly greater.
In June 2020, the Financial Times reported on investment of over $500 million into structures managed by Credit Suisse that were then used to finance Greensill’s activities. The investors were Softbank. Greensill itself provided supply chain-based finance to Softbank-backed entities and the flow of capital in its entirety has come to be seen as somewhat circular or self-perpetuating.
Ultimately, Softbank had reclaimed all its investments in Credit Suisse by July 2020 and Credit Suisse stated that no investors had suffered any losses as a consequence of these financial arrangements. Later on in 2020, and due to its apparent size, Greensill Capital was forced to find an alternative auditor to Saffery Champness.
Somewhat controversially, KPMG, Deloitte, and BDO, all rejected Greensill’s advances, even as Greensill was preparing to float itself on the stock market. Up until it filed for insolvency in March 2021, Greensill Capital and its ancillary entity Greensill Bank (based in Germany) had considerable exposure to GFG Alliance (as shown in figure 1), a group of organizations under the chairmanship of the steel tycoon Sanjeev Gupta.
Gupta himself was accused of operating a Ponzi scheme in April 2021 by a member of the UK’s parliament. In the midst of the administration processes of Greensill’s insolvency, it came to light that a number of invoices derived from loans made to Gupta could not be verified.
Companies that were listed on some of the invoices even denied having undertaken any business dealings with Gupta. Ultimately, GFG’s flow of capital relied ponderously on Greensill’s FARF and, emerging defaults of GFG logically arose as a result of Greensill’s insolvency. In March 2021, Bloomberg reported that the probable outcome, if Greensill were to collapse, would be insolvency for GFG Alliance. At that time, GFG had already defaulted on a number of its bonds.
In March 2021, Greensill Bank was banned from operating after a criminal complaint was filed by BaFin after the German financial regulator had been investigating Greensill Capital’s subsidiary for a number of months.
What with the accumulating controversy and potentially dubious financial operations, one would have been forgiven for thinking that the cutting-edge AI technology touted by the company by which they were identifying the best deals might also be suspect. And, it appears, it was Lex Greensill claimed that through utilizing complex algorithms consuming live data on sales and suppliers, Greensill was able to anticipate and forecast the flow of capital with supreme accuracy and were, therefore, able to assess credit liability before it manifested itself.
Company press releases were keen to sell the virtues of custom AI technology that could devour huge swathes of information. However, some of those people with knowledge of the company’s operations have confessed – anonymously – that a good deal of Greensill’s lending occurred as a result of the most elementary predictions, and as outlined by Bloomberg Businessweek, the company used this method to supply Bluestone a list of potential customers (in March 2021, Bluestone sued Greensill for fraud).
Indeed, back in 2019, Greensill acquired two fintech startup companies called Earnd and Finacity. This was a prudent public relations move in backing up the assertion that Greensill was making financing more equitable. In 2018, former UK Prime Minister David Cameron became attached to Greensill Capital in a consultation capacity.
The role was unpaid, but it did come with stock options estimated to have been worth around £70 million in light of any potential initial public offerings. According to various media sources (and described in the Guardian), Cameron made approaches to the UK government as a representative of Greensill.
The UK government’s HM Treasury published text messages in April 2021 that were sent by Rishi Sunak – UK Chancellor of the Exchequer – to Cameron which indicated that Sunak had pressed ‘the team’ to consider providing Greensill with ‘emergency government-backed COVID-19 loans’. The application was rejected in June 2020. Interestingly, HM Treasury has refrained from releasing the messages Cameron sent to Sunak even if it has indicated that Cameron also contacted other ministers too
The ongoing saga of Greensill is a cautionary one since it illustrates the liabilities of companies depending on financing that has been constructed upon supply chains. The sector is waiting to see what impact Greensill Capital’s potential collapse will have: the imposition on many businesses will inevitably require them to search for their finance elsewhere. Should Greensill wind up departing the marketplace wholesale, the void it leaves may very well drag other companies into the hole.
The end of the story of Greensill may not just be one of woe. Regulation and accountability surrounding supply chain finance are in need of closer scrutiny and modernization and Greensill’s sheer size may serve as a trigger. Expert observers of the sector have pointed out that credit provided to suppliers should be recategorized as debt rather than as a composite of trade payables.
The immediate benefit would be to create greater transparency regarding the financial health of a business. Either way, it seems there will be an outcry by professionals in the industry when it comes to how companies disclose their reliance on supply chain finance in the first instance, and even trade finance more widely thereafter
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