Greensill Capital faces possible insolvency after Credit Suisse suspends investment funds

Greensill Capital is headed toward a rapid unraveling after Credit Suisse Group suspended $10bn of investment funds that fuelled the SoftBank Group-backed finance startup.

UK-based Greensill has appointed Grant Thornton to guide it through a possible restructuring and it could file for insolvency, the UK equivalent of bankruptcy within days, according to people familiar with the company.

Greensill is simultaneously in talks with private-equity giant Apollo Global Management to sell its operating business for around $100m, according to people familiar with the talks.

Greensill’s problems came to a head on 1 March after Credit Suisse’s asset-management arm said it would stop allowing investors to buy into or sell out of four private investment funds that rely exclusively on debt-like securities created by Greensill.

A part of the funds is “currently subject to considerable uncertainties with respect to their accurate valuation,” according to a notice the bank sent to investors. The Wall Street Journal reported on 28 February that the bank was concerned about Greensill’s exposure to a single client, UK-based steel magnate Sanjeev Gupta, according to people familiar with the matter.

READ  Credit Suisse suspends $10bn in funds tied to Greensill

A Greensill spokesperson said the company acknowledged Credit Suisse’s decision, and that Greensill remains in advanced talks with potential outside investors.

If a deal comes together with Apollo, the private-equity firm would look to take over relationships with Greensill’s borrowers within days. These include a collection of blue-chip companies and government agencies such as Ford Motors and the UK’s National Health Service. Apollo isn’t interested in assets tied to Gupta, one of the people familiar with the talks said.

UK-based Greensill is the brainchild of former Citigroup and Morgan Stanley financier Lex Greensill. Founded in 2011, Greensill specialises in an area known as supply-chain finance, a form of short-term cash advance that lets companies stretch out the time they have to pay their bills.

Greensill packages those cash advances into bond-like securities that give investors a higher yield than they could get from bank deposits. Credit Suisse’s funds were a major buyer of those securities from Greensill, giving the startup more firepower to do deals with more companies. Investors in the funds include pensions, corporate treasurers and wealthy families.

Greensill’s troubles have the potential to spread pain to prominent players in the investment world. In addition to its relationship with Credit Suisse, Greensill received $1.5bn in backing from Japanese tech conglomerate SoftBank’s massive Vision Fund. A person familiar with the Vision Fund said it is expected to write down the entire investment.

Greensill counts former UK Prime Minister David Cameron as an adviser. It owns a bank in Germany and does deals that are closer to traditional merchant banking services, such as lending to large investment projects.

A SoftBank spokesperson didn’t immediately respond to requests for comment.

Gupta is a former Greensill shareholder and Greensill has supplied financing to Gupta’s GFG Alliance group of companies, which in the space of a few years have created a metals empire by acquiring failed steel mills and other distressed industrial businesses.

Last week, a bid by one of Gupta’s companies to acquire the steel operations of Germany’s Thyssenkrupp failed after the company ended talks over a deal.

German banking regulator BaFin last year began probing ties between Gupta’s businesses and Greensill’s German banking unit, according to a person familiar with the probe. A report from Scope Ratings in 2019 said about two-thirds of the bank’s loan book was linked to Gupta’s businesses.

A spokesperson for Gupta didn’t respond to a request for comment.

Last October, a Greensill spokesperson said the company had regular dialogue with German regulators, and that the bank’s exposure to Gupta’s companies was significantly lower at that point than at the time the report was released.

In supply-chain finance, Greensill competes with traditional banks such as Citigroup and JPMorgan Chase for investment-grade clients. Some of Greensill’s blue-chip clients include AstraZeneca and Ford Motors. Greensill has also extended financing to lesser-known companies, including small startup businesses and companies that are considered higher-risk borrowers.

In a typical supply-chain finance deal, Greensill pays a company’s suppliers sooner than they would normally expect, but at a discount. The company then pays Greensill the full amount down the road. The supplier gets paid early, the company has more flexibility over its cash and Greensill is left with a small profit.

Credit Suisse’s move to cut off the Greensill funds comes at a challenging time for the financing upstart. Greensill had anticipated extending $173bn in financing last year, according to a presentation viewed by the Journal, but ultimately provided $143bn, flat from the year before. Several Greensill clients hit financial troubles last year, while companies it partnered with loosened ties.

Greensill has recently been trying to raise up to $1bn in fresh capital. That process was initially expected to have been completed by early January, but it has stalled as the firm seeks to address the issues related to its Gupta exposure, according to people familiar with the fundraising.

It isn’t Greensill’s first run-in with a fund suspension. In July 2018, Swiss asset manager GAM suspended a $12bn fund after an internal whistleblower raised concerns about how the fund valued the Greensill assets. These included hundreds of millions of dollars of illiquid assets tied to Gupta’s businesses.

The suspension didn’t appear to stop Greensill from expanding. After the GAM funds wound down, Credit Suisse’s funds grew rapidly, giving the startup a fresh pool of investors that fuelled its ability to do supply-chain financing deals.

Greensill’s troubles could prove painful to SoftBank. The firm turbocharged other Vision Fund holdings by extending them short-term financing.

Not all of these deals have worked out. In December, Greensill forgave $435m in financing to construction startup Katerra, around the same time the Vision Fund put in an additional $200m into it to keep it afloat. Greensill received a roughly 5% stake in the Katerra in return. Last month, a Greensill spokesperson said investors hadn’t incurred losses related to Katerra.

Vision Fund investees Fair Financial, an auto-financing company, and View, a glass manufacturer, have also received financing from Greensill.

SoftBank’s multilayered roles in Greensill have drawn controversy. In addition to investing in Greensill itself, and receiving Greensill funds through its portfolio companies, SoftBank put $700m into the Credit Suisse-managed Greensill funds.

Last year, Credit Suisse executives grew concerned about potential conflicts of interest related to SoftBank’s roles. SoftBank ultimately redeemed its stake in the Credit Suisse funds, and the bank committed to protecting investors.

For Credit Suisse, the fund suspensions are the latest setback for its asset management division. The unit, which manages around $480bn, took a $450m impairment charge on a stake in investment manager York Capital Management after York downsized its operations, helping push Credit Suisse to a fourth-quarter loss.

Switzerland’s financial regulator Finma said on 1 March it contacted Credit Suisse about the fund suspensions but declined to comment further.

This article was published by The Wall Street Journal.