Amid Greensill Capital’s apparent unraveling, the question must be asked whether something specific to the business has caused the pressures and troubles, or whether it’s what might be thought of as a “one-off.”
As has been reported, the supply chain financing company is facing what might be an existential crisis. Earlier this week, Credit Suisse Group AG froze $10 billion in investment funds that have been critical to Greensill’s operations. The asset management division of Credit Suisse said it would not let backers purchase or sell four private investment funds that only depend on securities made by Greensill. Another fund manager, GAM Holding, froze its own investment activities tied to Greensill.
“A certain part of the subfunds’ assets is currently subject to considerable uncertainties with respect to their accurate valuation,” according to a statement from Credit Suisse. Drilling down a bit, Credit Suisse is reportedly concerned about Greensill’s exposure to a lone individual – Sanjeev Gupra, a British businessman focused on the steel industry.
With the investment funds frozen, Greensill has looked to Grant Thornton to mull a restructuring, and insolvency may be on the horizon. Or, the company may find an outright buyer in Apollo Global Management, at a purchase price of about $100 million.
Here’s a wrinkle, though: Last May, the company had said it provided a “final warning” to companies that use supply chain financing to stretch out payment terms beyond 30 days.
As described by The Wall Street Journal, the supply chain financing activity works as Greensill pays a client firm’s supplier(s) early in exchange for a discount. The full amount is later paid to Greensill by that firm. The cash advances are then packaged and sold. Those aforementioned Credit Suisse funds are invested exclusively in Greensill activity, with those investments sold to other holders.
In essence, we contend, there is a layer of supply chain financing activity, and then a securitization/secondary market for that activity. But when part of the chain freezes up, so to speak, the unraveling happens quickly.
There have been some turbulent spots before, too. As reported in May of last year, a few Greensill clients defaulted, tied to their own accounting scandals and other pressures. Those corporate events meant that Greensill and its insurers had to cover the losses in investment funds like Credit Suisse Asset Management. To get a sense of scale, the FT reported back then that funds have nearly $120 million of exposure in the troubled firms, which included Agritrade and BrightHouse.
Hurting Liquidity?
At the end of 2019, Moody’s Investors Service concluded that supply chain finance, also known as reverse factoring, might in fact hurt liquidity. “Users of financial statements may not be aware of a customer’s usage of reverse factoring, despite the potentially material consequences,” Moody’s Associate Managing Director William Coley said in a statement. “The customer itself may not fully understand the added risk that accompanies the use of this financing technique.”
And yet, as PYMNTS has noted, there exists a real need for some type of tech-driven salve for what be thought of as the “trade credit gap” that is estimated to be as much as $1.5 trillion. In an interview with PYMNTS, George Lee, chief operating officer of CCRManager, noted that digitization (and efforts that include supply chain finance) has not narrowed that gap.
“Digitization [is] happening in pockets, but trade finance is highly interconnected and [an] interdependent system,” he said. “Global efforts are still some distance away from being sufficiently collaborative, and this results in a disconnect between said pockets of digitalization.”
Now, it may be the case that the supply chain finance model – with its promises of higher yields to “end buyers” of the securitized loans – has a hiccup or takes a breather. Investors may be a bit more hesitant to put up the capital backing to underpin these early pay programs, driving companies large and small to adopt other ways of managing the day-to-day B2B activities/payments that exist between buyers and suppliers.