Finance

Lex Greensill’s high-risk deal making caught the eye of regulators, led to firm’s crisis

Lex Greensill’s company was in the staid business of matching risk-averse investors with safe, short-term loans. Greensill, though, was a deal maker who often preferred more complicated investments in speculative ventures.

Greensill’s deal making eventually caught up with Greensill Capital. It attracted the attention of regulators, drew questions from business partners and led a crucial insurer to walk away. Greensill collapsed into insolvency earlier this month after regulators took over its German bank and Credit Suisse Group AG froze its investment funds.

Greensill has in the past few years pitched deals to finance a nuclear submarine, fund risky startup companies and lend money to upgrade facilities used in the Muslim pilgrimage to Mecca, according to documents and people familiar with the proposed transactions.

While some of Greensill’s more speculative ideas never got off the ground, they illustrate the scale of his ambition and his high tolerance for riskier investments, according to people familiar with the company.

Some of the deals that did get done involved loans to companies that have encountered financial difficulties.

Greensill, a former Citigroup and Morgan Stanley banker, set up Greensill Capital in 2011. The company extended supply-chain finance, a type of short-term lending that helps clients manage their working capital. When the bills of companies’ suppliers came due, Greensill would front the payment, take a cut and get the full amount from the company down the road.

Greensill has stretched the definition of supply-chain finance. While a special adviser on trade finance to the UK government and running Greensill,  Greensill a few years ago proposed a plan to use supply-chain financing to pay for a multibillion-dollar nuclear submarine, said people familiar with the project. The idea was rejected because it would run afoul of government accounting rules, the people said. A spokesperson for the UK government didn’t immediately return requests for comment.

One person familiar with the plan said the supply-chain finance Greensill proposed would have been inappropriate because submarines are built to last for decades, so they are paid for using project finance, which is longer term.

As the business attracted investors, Greensill found new opportunities for deals.

Private-equity firm General Atlantic invested $250m in Greensill in 2018 for a roughly 15% stake in the company. It sold part of the stake and now owns about 7%, according to a person familiar with the matter.

READ Credit Suisse slashes bonuses, considers clawbacks for top brass amid Greensill fallout

In 2019, SoftBank Group Corp.’s Vision Fund invested about $1.5bn into Greensill. The investment valued Greensill at $4bn. Greensill initially had a close relationship with SoftBank Chief Executive Masayoshi Son, and the two had phone calls almost every day, according to people familiar with Greensill’s business.

The SoftBank money fueled a rapid expansion. Greensill’s staff grew from about 500 at the end of 2019 to more than 1,000 recently. Greensill began to lend to other companies that had gotten investments from SoftBank.

At one point, Greensill and SoftBank executives discussed a plan to create investments tied to the hajj, the Muslim pilgrimage to Mecca, according to documents reviewed by The Wall Street Journal and people familiar with the matter. The plan involved providing loans for hotels, infrastructure and transport related to the hajj, which would be bundled up into securities and sold to investors. The plan never materialized.

Greensill didn’t return requests for comment. SoftBank and Credit Suisse declined to comment.

Another plan, dubbed Project Olympus, involved lending billions of dollars to shared-office company WeWork, according to people familiar with the matter. WeWork, which was also backed by SoftBank’s Vision Fund, ultimately rejected the plan, the people said. WeWork had been seen as a Vision Fund darling but ultimately needed a bailout by SoftBank when it racked up losses.

READ Credit Suisse warns of potential charge from Greensill Capital fallout amid trading surge

Of the loans Greensill did make, four of the biggest went to Vision Fund companies. Early last year, it wanted to boost $600m in financing it had made available to Indian hotel chain Oyo Hotels & Homes up to $3bn, according to a document reviewed by the Journal and people familiar with the matter.

The pumped-up funding would let Greensill “book significant additional revenue through the remaining upfront fee,” according to the document. The deal fell apart as Covid-19 spread, one of the people said. Some Greensill executives felt they had dodged a bullet, as Oyo’s business came under pressure during the pandemic due to travel restrictions, leading it to cut staff.

Oyo, which is unprofitable, has faced issues from its rapid expansion, the Journal has reported, including thousands of hoteliers leaving its network amid complaints from many that they had been treated unfairly. The Vision Fund has written down the value of its stake in Oyo by more than half, the Journal reported, citing a person familiar with the matter.

Another loan by Greensill surprised General Atlantic. Greensill lent about $170m for five years to Tradeshift Network, a payments processing company that sometimes works with supply-chain finance firms, according to people familiar with the transaction. Typical supply-chain finance deals are for 60 to 120 days. Greensill sketched out the deal over glasses of wine with Tradeshift’s CEO. If Tradeshift defaulted, Greensill would own the company, these people said.

General Atlantic was caught off guard by the deal because it earlier had considered but didn’t make an investment into Tradeshift, according to people familiar with the deal.

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Last summer, General Atlantic Co-President Gabriel Caillaux was in the UK on unrelated business when Greensill offered him a ride to his next destination on a Greensill private plane. Caillaux on the flight cautioned Greensill against growing for growth’s sake, said a person familiar with the conversation.  Greensill reassured him the company expected to hit its targets, the person said.

Greensill last fall embarked on a fundraising round to bring in capital, hoping to raise about $1bn, the Journal has reported, citing people familiar with the fundraising. Greensill told people within the firm that General Atlantic was planning to contribute several hundred million dollars toward the effort, people familiar with the matter said. A General Atlantic spokeswoman denied that the firm had considered putting money into the round.

Greensill’s board also became concerned that most of the firm’s revenue was tied up in loans to just a handful of businesses, people familiar with the board said.

One loan caused particular concern for some of the Greensill board: Vision Fund company Katerra, a construction startup, the people said. The unwinding of the deal shows the tangled relationship between Greensill and SoftBank.

Katerra was close to filing for bankruptcy last year when it was rescued by SoftBank with a $200m infusion. As part of the deal, Greensill forgave a $435m loan in exchange for a roughly 5% stake in the company, Katerra’s chief executive told the Journal in December. SoftBank then put $400m into Greensill to shore up investors in the Credit Suisse funds who were exposed to Katerra, the Journal earlier reported, citing people familiar with the capital transfer.

READ Greensill ditches fleet of private planes ahead of fundraising effort

In early November, General Atlantic asked the company for a legal review of how the Katerra situation was resolved, according to an email reviewed by the Journal. General Atlantic also asked the board’s risk committee to review all loans to SoftBank companies and it resigned from the board’s audit committee.

Ultimately, regulators and the company that insured the firm’s loans caught up with Greensill. The German banking regulator, which had asked Greensill to reduce its exposure to its biggest client, told it to move faster, Greensill told the board early this year, said a person familiar with the board. Greensill said the firm wouldn’t be able to meet the deadline.

Soon after, one of the firm’s insurers refused to renew its policy. That prompted Credit Suisse to freeze the funds, leading to Greensill’s insolvency.
Write to Julie Steinberg at [email protected] and Duncan Mavin at [email protected]

This article was published by Dow Jones Newswires

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