Greensill Capital’s implosion

Lugano, Switzerland - 15 march, 2016: Credit Suisse sign over the entrance of the Credit Suisse office. Credit Suisse Group is a Switzerland-based multinational financial services holding company.

Credit Suisse sent tremours through the financial industry two weeks ago after it chose not to renew a £3.3bn contract with the supply-chain financier, Greensill Capital. Credit Suisse, Greensill Capitals largest insurer, then froze a fund linked to the firm worth £7.7bn.

Greensill Capital subsequently imploded, filing for administration yesterday. In its wake, Greensill Capital has left companies from the UK to Australia in severe financial distress.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, details the effects.

The collapse of Greensill Capital is sending ripples of panic through financial and industrial circles who were dependent on its supply chain funding and investment opportunities it provided. For companies reliant on its factoring service, the great scramble has begun to find other ways of covering the looming cavern in their finances. Those investors who had bought the debt sold on the market are now staring at potentially big losses.

The writing was on the wall for Greensill Capital after its lost its credit insurance for the $4 billion short term debt it had taken on for its array of customers around the world, from Australian construction and telecoms companies to the international steel business GFG Alliance, which owns the Liberty Steel group.  GFG says it will find new channels of finance but it’s by no means a certainty, putting thousands of jobs at risk in its sprawling steel empire.

Greensill had put a shadow banking spin on the traditional business practice of factoring, where suppliers sell at a discount debts their customers owe to them to a third party who collects the full amount when its due.

Greensill chopped up and repackaged that debt and sold it on the financial markets at a huge scale. But there was a flaw at the heart of the global operation. Greensill was hugely reliant on insurer providing cover for that debt, and its withdrawal set in motion the slow financial train wreck of the past week.

The crisis is like a microcosm of the securitised mortgage debt house of cards which triggered the financial crisis in 2008. Now questions will be asked about why Greensill’s business partners stayed so reliant on the firm even after a number of warning lights began flashing. The number of clients defaulting on their debts began piling up last May, as it emerged it had provided funding for collapsed firms Brighthouse and  NMC Health, which was the centre of an accounting scandal. It also emerged Sanjeev Gupta, owner of GFG alliance, which was Greensill’s largest client, had also been a shareholder in Greensill.

Softbank’s role in particular is likely to come under scrutiny. Its backing of Greensill is yet another high profile investment, made by the Japanese conglomerate which has which has turned sour. Its Vision fund had already ploughed billions of dollars into a series of disappointing start-ups, not least We Work which was forced to cancel its IPO.

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