Greensill Capital (a UK based supply chain finance company founded in 2011) filed for insolvency protection on March 8, 2021, having raised over $2 billion in capital.
Supply Chain Finance is a wonky subject. If you talk about it at a cocktail party people look over your shoulder to find somebody more interesting to talk to. Smooth talking hustlers find a way to sex up such wonky subjects. Think of Elizabeth Holmes (Theranos) in blood tests, Ken Lay (Enron) in utility deregulation and Adam Neumann (WeWork) in office rents. Now we can add Lex Greensill in Supply Chain Finance to that list.
Greensill Capital is a big story, already covered in a lot of pixels. At Daily Fintech we aim to dig below the headlines to find out what is really going on ie to add value not just “content” as we have done many times on the subject of Supply Chain Finance. See here for all posts tagged supply chain finance.
So I indulged my inner wonk to find out what went wrong at Greensill Capital, looking at 5 theories:
- Fatally flawed idea? Was Greensill Capital just offering invoice discounting/factoring ie nothing new? This theory is easy to discard as Greensill was offering reverse factoring Supply Chain Finance, which is working so well for other firms in this market such as Citibank, JP Morgan, Santander, Orbian and Taulia,
- Pandemic casualty? Small businesses have been hammered by the pandemic. Maybe this caused Greensill to fail as they served small business? This theory is also easy to discard, as Greensill borrowers had nothing do with your friendly local shop/bar etc. However the feel good association with our favourite small businesses was used to sex up a wonky subject.
- Canary in the coal mine of corporate debt? This is plausible because of an obscure accounting rule that allows companies to book Supply Chain Finance in the “accounts payable” line on a balance sheet. This is real, but minor as the amount of debt through SCF is still quite small.
- Hunt for yield in a low interest rate world? This is plausible because Geensill did push into high yield/deeply distressed credit. However this is not the main story as there are so many bigger examples of investors hunting for yield by reducing credit quality
- Great idea, lousy execution? Greensill Capital was offering “reverse factoring”, which is a great idea. The credit is based on the Payable (not the Receivable) of the Corporate buyer (not the SME seller). Let’s say the Buyer is a AAA rated Corporate and an approved invoice from a Seller is being financed for 3 months. What is the risk that a AAA rated Corporate will not pay an invoice that they have approved? The risk is comparable to developed country sovereign debt, but with a much better risk-adjusted return on capital. However, execution, although not a sexy subject, does matter. This is the main story. Greensill Capital made three big execution errors:
- expansion into lower credit quality assets. What is the risk that a CCC rated rated Corporate will not pay an invoice that they have approved? Let’s just say that it is much higher risk than for A or B rated Corporates.
- Too many funding sources. Greensill Capital had their own bank as well as a relationship with Credit Suisse to tap the capital markets. Complexity such as that is hard to manage.
- No good SCF technology. SCF is Fin + Tech. Greensill was Fin only.
There are a couple juicy subplots:
- SoftBank taken in by another smooth talking hustler? Adam Neumann maybe younger and sexier but the parallels are obvious. However Lex Greensill also fooled General Atlantic Partners who are known for the quality of their analysis before making an investment.
- Smooth talking hustler blowing investor cash on Private planes. That story gets clicks. It is part of a late stage bull market story of too much capital chasing too little growth, but is not the main story.
The main story is simple – quality of execution matters.
Apart from the fact that a high profile company went bankrupt, a lot of reputations have been damaged:
- BAFIN. The German regulator was already damaged by Wirecard. Their Reputation has been further damaged by the Greensill Bank operating under its oversight.
- Bankers. Credit Suisse emerged relatively unscathed from the financial crisis in 2008, but their involvement in Greensill’s funding operations does not look good at all and the fallout may have only started. Citibank, a well respected player in the SCF market, does not good from their role selling Greensill to investors.
- SoftBank. This is not so surprising as they appear to have a weakness for big visionary founders who do not deliver.
- General Atlantic Partners. This is a surprise as they are known for the quality of their analysis before making an investment.
- David Cameron and Prince Charles. These smart, wealthy well connected people damaged their brands by association with a smooth talking hustler. They can take comfort from how many other smart, wealthy well connected people have been taken in by people like Elizabeth Holmes, Ken Lay and Adam Neumann.
- IAG. This Australian Insurer has major exposure to Greensill.
Here are the reputations that emerged relatively unscathed and are even possibly enhanced:
- Auditors. This is not an Enron or GFC story. Big auditors suchas KPMG, BDO and Deloitte did their job by blowing the whistle.
- Rest of the SCF market. Greensill Capital was a minor player and the market will emerge stronger for them being removed.
- Financial Times. Their coverage enhances their reputation for high quality journalism.
- Lord Myners. Lord Myners, the former City minister, was early in his warnings about Greensill.
To help me understand the banker’s perspective I approached (American translation = “reached out to”) Howard Tolman, a Banker and technology entrepreneur, who now curates the Alt Lending news for Daily Fintech:
Howard focussed in our conversation on an old fashioned banking discipline – assessing credit quality. As Howard put it to me
“relying on auditors or the reputation of the bank packaging the asset for sale is horribly reminiscent of selling low credit quality mortgages as triple A. Different asset of course but the two dogs are related”.
Daily Fintech’s original insight is made available to you for US$143 a year (which equates to $2.75 per week). $2.75 buys you a coffee (maybe), or the cost of a week’s subscription to the global Fintech blog – caffeine for the mind that could be worth $ millions.