Pushing the Envelope – Greensill Capital
Greg Connell, founder and Managinmg Director of InfolinkGazette.
Greg Connell, founder and Managinmg Director of InfolinkGazette.
Greensill Capital (UK) Limited and Greensill Capital Management Company (UK) Limited, both filed Administration Applications in the High Court on 8th March 2021, following its insurer Credit Suisse refusing to renew $4.6 billion of insurance. Signalling a spectacular fall from grace for a business once valued at £3.5 billion.
Greensill claimed to be the market-leading provider of working capital finance for companies,
promising to: “unlock capital so the world can put it to work”. Founded in 2011 by Lex Greensill, the
company headquartered in London provided Supply Chain Finance to customers across Europe,
North America, Latin America, Africa, and Asia and worked with a host of banks and institutional
investors that underpinned the companies claims to “provide solid funding streams”.
To the casual observer Greensill’s Supply Chain Finance business was essentially a factoring business with a fintech makeover, where the creditor relationship had been switched. But Greensill believed they were about much more than Supply Chain Finance. Greensill’s claims included harnessing the power of financial markets to: “unlock capital on terms that fit the precise requirements of our clients, from 20 days to 20 years and beyond”. With the benefit of hindsight, these claims look like they were underpinned by daring financial manoeuvres breaching risk limits that cannot be exceeded safely.
Before the fintech makeover, Supply Chain Finance was a simple low risk business with most banks offering it to blue-chip customers with investment grade credit limits. Where the process begins to get complicated, and risk starts to rise is when customers opt to delay making payments to the Bank. Whereas supplier invoices are normally settled in 60 days, users of supply chain finance can push back payments to 180 days. It is attractive to the supply chain finance provider because it increases margins, and there’s no shortage of overly indebted companies that see the attraction of this type of finance; possibly because it doesn’t appear on the balance sheet as debt. Carillion and NMC Health were major user of supply chain finance.
Greensill ratcheted up the risk a notch or two with customers availing of both supply chain finance and receivable financing, especially when the risk was so concentrated, with a reported $5 billion of receivables financing for companies associated with the GFG Alliance Group. Embracing ever higher levels of risk, Greensill pioneered turning future receivables/sales in to cash. This is probably fine with the likes of Tesco Mobile Ltd, with hundreds of thousands of customers on annual contracts. However, lending cash to companies associated with GFG Alliance on the basis of several years of projected future steel sales must have created completely unpredictable levels of risk.
The Covid-19 Pandemic created new uncertainties and risks, but also new opportunities for Greensill. After being admitted to the Coronavirus Large Business Interruption Loan Scheme in June 2020, Greensill seem to have breached their £50 million loan cap with £200 million of loans to companies linked to GFG Alliance, which will invalidate the 80% government guarantee on the loans, leaving Greensill on the hook for the loans.
The “solid funding streams” now look distinctly soft and as those Greensill clients that had become reliant on Supply Chain Finance scramble to arrange alternatives, they can expect to be subject to higher levels of scrutiny than would have been the case at Greensill. And the 40 to 50 Greensill customers who pledged assets by way of a secured charge are likely to find it hardest of all to replace the lost financing.
About the Author: Greg Connell is the founder of InfolinkGazette and a Risk Management Professional with over 40 years’ experience in the Risk Management Industry, including senior roles in Sales, Finance, Operations & Marketing. He was previously, National Sales Manager of D&B UK, European Finance Director of Dun & Bradstreet Europe, Managing Director of D&B Ireland and before that was head of European Marketing for D&B’s Debt Collection and Credit Reporting businesses. Greg was also a board member at Registry Trust, the register of Judgments, Orders and Fines, where he remains a Member of the Trust. Greg is also a pension trustee, and a former chairman of both UK and Irish pension schemes; he remains a company nominated trustee director of the Dun & Bradstreet UK Pension Company, with assets under management of over £300 million.
To the casual observer Greensill’s Supply Chain Finance business was essentially a factoring business with a fintech makeover, where the creditor relationship had been switched. But Greensill believed they were about much more than Supply Chain Finance. Greensill’s claims included harnessing the power of financial markets to: “unlock capital on terms that fit the precise requirements of our clients, from 20 days to 20 years and beyond”. With the benefit of hindsight, these claims look like they were underpinned by daring financial manoeuvres breaching risk limits that cannot be exceeded safely.
Before the fintech makeover, Supply Chain Finance was a simple low risk business with most banks offering it to blue-chip customers with investment grade credit limits. Where the process begins to get complicated, and risk starts to rise is when customers opt to delay making payments to the Bank. Whereas supplier invoices are normally settled in 60 days, users of supply chain finance can push back payments to 180 days. It is attractive to the supply chain finance provider because it increases margins, and there’s no shortage of overly indebted companies that see the attraction of this type of finance; possibly because it doesn’t appear on the balance sheet as debt. Carillion and NMC Health were major user of supply chain finance.
Greensill ratcheted up the risk a notch or two with customers availing of both supply chain finance and receivable financing, especially when the risk was so concentrated, with a reported $5 billion of receivables financing for companies associated with the GFG Alliance Group. Embracing ever higher levels of risk, Greensill pioneered turning future receivables/sales in to cash. This is probably fine with the likes of Tesco Mobile Ltd, with hundreds of thousands of customers on annual contracts. However, lending cash to companies associated with GFG Alliance on the basis of several years of projected future steel sales must have created completely unpredictable levels of risk.
The Covid-19 Pandemic created new uncertainties and risks, but also new opportunities for Greensill. After being admitted to the Coronavirus Large Business Interruption Loan Scheme in June 2020, Greensill seem to have breached their £50 million loan cap with £200 million of loans to companies linked to GFG Alliance, which will invalidate the 80% government guarantee on the loans, leaving Greensill on the hook for the loans.
The “solid funding streams” now look distinctly soft and as those Greensill clients that had become reliant on Supply Chain Finance scramble to arrange alternatives, they can expect to be subject to higher levels of scrutiny than would have been the case at Greensill. And the 40 to 50 Greensill customers who pledged assets by way of a secured charge are likely to find it hardest of all to replace the lost financing.
About the Author: Greg Connell is the founder of InfolinkGazette and a Risk Management Professional with over 40 years’ experience in the Risk Management Industry, including senior roles in Sales, Finance, Operations & Marketing. He was previously, National Sales Manager of D&B UK, European Finance Director of Dun & Bradstreet Europe, Managing Director of D&B Ireland and before that was head of European Marketing for D&B’s Debt Collection and Credit Reporting businesses. Greg was also a board member at Registry Trust, the register of Judgments, Orders and Fines, where he remains a Member of the Trust. Greg is also a pension trustee, and a former chairman of both UK and Irish pension schemes; he remains a company nominated trustee director of the Dun & Bradstreet UK Pension Company, with assets under management of over £300 million.
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