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1 March 2021 By Liam Proud

Lex Greensill, a self-styled financial innovator, is being disrupted by old-school risks. His eponymous supply-chain finance group suffered a blow on Monday when Credit Suisse suspended $10 billion of funds backed by assets the SoftBank-backed group had created for it. The question now is who will fill the funding gap for the company’s products and its clients, like steel magnate Sanjeev Gupta.

Greensill, whose advisers include former British Prime Minister David Cameron, added rocket fuel to the humdrum business of invoice discounting. That’s where banks provide funding to companies by paying their suppliers early, allowing the borrower to spread payments over time. Instead of just keeping the invoices on its balance sheet, Greensill would package up claims into bonds, and sell them through vehicles like the Credit Suisse Asset Management’s supply-chain funds, which were placed with cash-rich companies and other investors. Greensill arranged $143 billion of financing in 2019.

Credit Suisse has now frozen redemptions on its four funds which sourced their assets through Greensill, citing “considerable uncertainties with respect to their accurate valuation”. The Wall Street Journal reported on Sunday that the Swiss bank was worried about the funds’ exposure to industrialist Gupta, whose sprawling GFG Alliance empire has borrowed heavily through Greensill.

Greensill’s first issue seems to be overconcentration of risk in a single credit, although the Credit Suisse funds do not disclose how much Gupta-linked debt they hold. German regulator BaFin has also pushed Greensill to reduce its exposures to the industrialist, made through a local Greensill-controlled bank, the Financial Times says. The second problem was channelling relatively risk-averse investors’ cash into esoteric assets that aren’t publicly traded. One of the Credit Suisse funds targeted a low 0.8% return above three-month LIBOR and touted a “short term maturity profile”. Now its investors are stuck because Credit Suisse can’t work out what the assets are worth.

The risk for Greensill, and its clients like Gupta, is that such cheap, short-term funding now becomes scarcer, or more expensive. Alternative potential backers may expect higher returns to compensate for the risks, hurting future growth. Bloomberg reported on Monday that SoftBank was considering writing down the value of its equity investment in Greensill to almost zero. The supply-chain finance revolution may have run its course.

 

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